Originally published on Jun 21, 2014.
UK-based financial information and research firm Markit (MRKT) had a larger-than-expected initial public offering on Nasdaq, Thursday, as the company sold 53.47 million shares at a price that's hovering around $24 a share. and shares began trading at $26.15, up more than 10%.
On the face of it, this is obviously good news for Markit as it looks to consolidate the ballooning market for centralized data crunchers that help value and process complex financial instruments. However, all the shares that were sold, were sold on behalf of selling shareholders: Markit won't receive any proceeds from the IPO.
The shareholders, mostly banks including: Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and JPMorgan, raised $1.3 billion in gross proceeds after raising the number of shares from the originally planned offering of 45.7 million to 53.7 million.
A Return for Shareholders
For Markit, this is still important as its shareholders are getting a big return on investment, and, indeed, they still retain between 3%-6% ownership of the company. This keeps them on the books to participate in further upsides as well as fund acquisitions that challenge larger rivals such as Bloomberg, Thomson Reuters and IBM Analytics.
Canadian Lance Uggla, a trader working in London, created Markit in 2003 as a central repository of data on non-listed assets and derivatives collected from financial market participants. Its initial product was a daily pricing product for credit default swaps, an opaque category of derivatives valued independently by dealers and funds.
The so-called "ABX" index, famously became a way for banks and their clients to wager on the subprime-mortgage market ahead of and during the financial crisis. Since then, the company has expanded to offer data and analytical information about markets, process trades for clients and design technologies to analyze trading and risk.
It now boasts more than 3,000 employees in more than 10 countries.
"This was the culmination of many months of hard work," Uggla told the New York Times' Deal Book blog. "I think the result is some great brand recognition."
There are some ongoing concerns for shareholders, however. The company came under intense Congressional scrutiny over its ABX index and its IPO prospectus, acknowledged risks including litigation and the possibility of paying fines. In 2009, for instance, the US Justice Department confirmed it had launched a probe into possible antitrust violations in the credit-default-swaps market. Markit, along with several banks, was targeted for allegedly controlling prices.
The company maintain it acted properly at all times and no penalties are planned in the probe. However, The Wall Street Journal reported last year that it was subject to a parallel probe by European authorities into possible anticompetitive behavior in CDS markets.
Uggla Eyeing Acquisitions
Markit's revenue grew 24% between 2011 and 2013, and its cash flow surged 38% over that time. In the first quarter of this year, its annual run rate of revenue surpassed $1 billion. Much of the firm's revenue comes as annually recurring fees, lending stability to the business in a volatile market.
Indeed it's a relatively "sticky" business as Markit is relied upon to perform core analytical and pricing work. With the successful IPO, Uggla is already confident that acquisitions will follow.
"Markit has always grown organically and enhanced that through acquisition," he told Financial News. "Most of these have been bolt-on acquisitions where we can grow the acquisition and find additional growth. This is a core part of our ethos and the company's vision for the future."
Uggla did stress that any "potential acquisitions would focus across its three main business lines of information, processing and solutions." But in its short history it has already bought a total of 25 companies, amounting to $1.8 billion. You should expect, with the extra-currency brought to its investors, more acquisitions will follow.
There are countless growth opportunities for Markit as it continues to push-up against the big financial information providers like Bloomberg and Reuters. What gives me confidence that it will continue to compete against those giants is the billions in revenue it continues to draw and the confidence it has brought its investors.
Its listing on Nasdaq entrenches the company, headquartered in London, as a largely transatlantic business, making net profits of $139m on revenues of $948m last year. Much of that growth has come by acquiring other financial technology companies.
These acquisitions have helped it push into forecasting risk and processing over-the-counter derivatives-areas that have assumed greater importance for regulators following the financial crisis.
I believe those who bought the stock at the $24 share price will get a great long-term return on investment. The stock will likely rise in the short term too, especially as the company's path to expansion becomes clearer.
However, there will be a period of uncertainty as EU anti-trust investigations windup, likely to complete in 2015. Until then, I would caution against investing at anything over $30 a share.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.