NASDAQ OMX Adds To Indexing Business With $225 Million Acquisition
NASDAQ OMX Group (NASDAQ:NDAQ), one of the most well-diversified global stock market operators, recently announced the acquisition of American index and analytics provider Dorsey Wright & Associates for $225 million with an intent to expand its exchange-traded fund (ETF) trading and indexing business. [1] According to NASDAQ management, the acquisition will contribute to the upcoming earnings in late January, and should not impact capital return plans.
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NASDAQ Acquires Dorsey Wright
The Dorsey Wright acquisition can be seen as NASDAQ’s response to London Stock Exchanges Group (LSE) making a mammoth $2.7 billion acquisition of Russell Investments, the operator of the Russell family of indexes, in November last year. [2] LSE’s stock has risen by almost 10% since it made the announcement.
NASDAQ is a leading global index provider with over 9,000 structured products under its index licensing and services business. The company’s indexes catered to 148 ETFs at the end of 2013, with assets of over $92 billion under management. NASDAQ added another 21,000 indexes in 2013, under its NASDAQ Global Index banner, covering 9,000 securities in over 45 countries. Furthermore, the company added another 11,000 indexes through the first three quarters of 2014. Correspondingly, NASDAQ OMX had assets of over $96 billion in ETFs in the same period. NASDAQ will now have control over 17 of Dorsey Wright’s ETFs and 69 of its smart-beta ETFs.
With the Dorsey Wright acquisition, NASDAQ OMX is also betting on the smart-beta indexing business, which it expects to generate returns in the long run. Smart-beta indexing is different from traditional market cap-based indexes as they weigh in certain other factors to gauge value. Dorsey Wright predominantly operates in relative strength indexes, which take into account market performance. In addition to the ETFs, NASDAQ’s Global Indexes division will also gain access to over $45 billion in invested assets to Dorsey Wright’s smart-beta indexes and about $105 billion benchmarked to existing NASDAQ indexes. [3] Dorsey Wright licenses its indexes to investment management firms PowerShares and First Trust. These license agreements should help NASDAQ OMX generate higher index licensing revenues with a potential to grow its subscriber base to other investment adviser firms. According to management, the acquisition fits in strategically with the company’s vision of future in the indexing market space.
We currently have a conservative forecast for revenue growth for NASDAQ’s Global Index business. We estimate that the revenue generated by index licensing could grow at a CAGR of about 3% over the next five years. However, if the index licensing business witnesses 8-10% annual growth in the same period, it could lead to a 2-3% upside to our $45 price estimate for NASDAQ OMX’s stock. Our price estimate is slightly below the current market price, which has risen by over 10% since the company released its Q3 earnings in late October.
You can modify the interactive chart below to gauge the effect a change in NASDAQ’s Global Index revenue will have on our price estimate for the company’s stock.
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- Nasdaq buys US index provider for $225m, Financial Times, January 2015 [↩]
- LSE to conclude Russell deal within weeks, Financial Times, November 2014 [↩]
- Nasdaq to buy Dorsey Wright for $225 million, Market Watch, January 2015 [↩]