Dipping its foot into the electronic fixed-income world, Nasdaq OMX Group (NASDAQ:NDAQ) unveiled a deal worth as much as $1.23 billion on Monday to acquire the eSpeed platform from BGC Partners (NASDAQ:BGCP).
The transaction sent shares of New York-based brokerage BGC, which had a market cap of just $632 million before the announcement, skyrocketing as much as 90% in after-hours action.
The acquisition comes as traditional exchanges like Nasdaq continue to search for new revenue sources as they grapple with slumping trading volumes.
In exchange for eSpeed, which operates a fully executable central limit order book for electronic trading of U.S. Treasuries, Nasdaq agreed to pay BGC $750 million in cash plus certain contingent issuances of stock that BGC values at up to $484 million over 15 years.
“We are building a diverse, customer-centric portfolio of corporate, trading, technology and information solutions,” Nasdaq CEO Bob Greifeld said in a statement. “The acquisition furthers our stated diversification strategy, and strengthens our commitment to deliver significant value to shareholders."
The acquisition represents a bet by Nasdaq that the less-sexy bond market will continue to grow even as equity trading continues to slump. The exchange said it expects U.S. Treasury trading volumes to increase from their current level of $500 billion per day.
Nasdaq cited diminished economic headwinds and the eventual end of the controversial quantitative easing program by the Federal Reserve, which the exchange said has “artificially depressed the natural volatility” in the Treasury market.
For BGC, the deal marks a huge cash windfall for a business unit the brokerage has been developing for years.
“We think that the market was clearly under-valuing the assets of the company. This transaction should better enable investors and analysts to place an accurate valuation on BGC's assets post-closing,” BGC CEO Howard Lutnick said in a separate statement.
Shareholders agreed with that assessment, sending BGC surging more than 90% in extended trading before paring their gains. In recent action, the stock was up 49% to $5.74.
Shares of New York-based Nasdaq inched up 0.17% to $32.06 after falling 0.9% to $32.01 during regular trading.
Nasdaq said it expects the transaction to add to its bottom line within the first 12 months after closing, excluding transaction-related costs. The exchange also anticipates using the eSpeed platform to trade new fixed-income products.
To pay for the deal, which is expected to close in the middle of 2013, Nasdaq secured committed bridge financing from unspecified lenders and also plans to use existing cash as well as selling new debt.
BGC said that if certain “acceleration events” occur, including a change of control of Nasdaq, whatever remains of the earn-out will be paid out immediately.
BGC also said it has agreed not to compete with Nasdaq in fully electronic, on-the-run, benchmark U.S. Treasury notes for three years following the close of the deal. However, the brokerage said it retains the right to use the trading technology it has developed for the eSpeed platform.