Thomson Reuters Corp
plans to buy electronic foreign exchange platform FX Alliance Inc for $625 million to expand its bank-focused currency trading business to fund managers and corporates.
More than $5 trillion worth of foreign exchange and FX derivative transactions take place every day, though the market is fragmented. Thomson Reuters is a leading provider of information and trading in the sell-side interbank foreign exchange market, where it competes against ICAP Plc .
FX Alliance and its competitors, which include Hotspot FX and State Street Corp , focus on the investment community, such as asset managers, corporations and hedge funds.
"Each entity is missing a segment of liquidity, so combining the two is essential to stay competitive going forward in the very fragmented FX market," Howard Tai, senior analyst with the Aite Group, wrote of Thomson Reuters and FX Alliance.
"Thomson Reuters' FX matching is mostly an interbroker electronic platform, whereas FXall is predominately an electronic platform for corporates and the buy-side community," he wrote in a research note.
Thomson Reuters, which provides news and information to financial, legal, accounting and tax professionals, offered to pay $22 per share for FXall, a premium of about 40 percent over its Friday close of $15.70 on the New York Stock Exchange.
Shares of FXall soared 39.9 percent to close at $21.96 on Monday, the biggest gainer on the NYSE. Shares of Thomson Reuters edged 0.1 percent lower to $28.44 on the NYSE.
Claudio Aspesi, senior analyst with Sanford Bernstein, said the acquisition signals Thomson Reuters' dedication to the financial services business and called the foreign exchange segment a "bright spot."
"It simply ramps up what is already a very strong market position in foreign exchange," he said.
Thomson Reuters underwent a series of structural changes and management shakeups in 2011 to address lackluster performance in some of its businesses targeting financial and banking clients. Its businesses aimed at legal, tax and accounting professionals have been much stronger.
Aspesi said the FXall deal indicated that Thomson Reuters was prepared to invest in its financial services business, not just in its professional services.
"If there was a good opportunity within the financial service area of the company it should be exploited no matter what. It shows management is confident enough to do that," he said.
FXall, which provides 24-hour access to forex markets five days a week, was founded in 2000 and listed on the NYSE in February at $12 per share. The shares rose as much as 20 percent in their market debut.
Last week, the company announced a record total average daily trading volume of $98.6 billion in June, a 10 percent increase on both the previous month and on June 2011.
UBS analyst Phillip Huang estimated that the acquisition could add $145 million in revenue and complement Thomson Reuters existing $1.7 billion foreign exchange business.
The FXall deal signals that the pace of acquisitions is likely to accelerate over the next few years as Thomson Reuters looks for growth, particularly in the Financial & Risk segment, RBC analyst Drew McReynolds wrote in a note.
According to the Bank for International Settlements (BIS), which tracks foreign exchange turnover globally, dealing between banks in 2010 fell behind turnover between banks and non-bank financial institutions -- pension funds, hedge funds, insurance companies, etc. -- for the first time.
Trades with non banks made up 48 percent of counterparty turnover in 2010, against 39 percent for traditional interbank deals.
FXall's largest shareholder, Technology Crossover Ventures, as well as its chairman and CEO, Phil Weisberg, and Chief Financial Officer John Cooley -- who together own around 32.5 percent of its stock -- have already agreed to tender their holdings. The board recommended other shareholders also sign up.
Thomson Reuters said it expects the deal to close in the third quarter. Barclays is advising Thomson Reuters while JPMorgan is advising FXall.