Nasdaq Acquires Solovis For eVestment Unit

Summary

• Nasdaq has acquired Solovis for an undisclosed sum.
• Solovis has developed a unified view platform for investment managers to maximize their ability to analyze and make well-informed decisions.
• The deal builds out Nasdaq's eVestment capabilities.
• NDAQ has dropped to around $100; given near-term uncertainties from the Covid-19 pandemic, my bias is Neutral.
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Quick Take

Nasdaq (NASDAQ:NDAQ) has announced the acquisition of Solovis for an undisclosed amount.

Solovis has developed a unified system for viewing multi-asset class portfolio information.

With the deal, NDAQ is building out its eVestment offering with a unified view of financial information.

NDAQ is down 14% from its recent high as uncertainties from the effect of the Covid-19 pandemic weigh heavily. My bias on the stock at its current price of around $100 is Neutral.

Target Company

Dallas, Texas-based Solovis was founded to develop an integrated software suite to enable portfolio managers to view their full range of investments across multiple asset types, whether for public or private investments.

Management is headed by Co-founder and Chief Executive Officer Josh Smith, who was previously Managing Director at CTO3 and Associate at Investure.

Below is an overview video of a customer testimonial:

Source: Solovis

Solovis’s primary offerings include:

• Data collection

• Data aggregation

• Analysis

• Predictive analytics

• Report sharing

Company partners or major customers include:

• Endowments, Foundations & Pensions

• Family Offices

• RIA's and Fund of Funds

• Administration

Investors have invested at least $19.5 million and include Edison Partners, Timberline Venture Partners, OCA Ventures, MissionOG, FINTOP Capital, Cultivation Capital and Northwestern University.

Market And Competition

According to a 2019 market research report by Kenneth Research, the market for investment management software was valued at $2.4 billion in 2017 and is expected to grow at a CAGR of over 11.5% from 2018 to 2025.

The primary driver for the market is expected to be a 'growing need for reliable and efficient processing of investment-related data and a rising need for efficient asset management in different organizations.'

The market is highly fragmented, with dozens of market participants of varying sizes.

Major vendors that provide competitive services include:

The dominant region has been North America but the Asia Pacific region is expected to grow at a higher growth rate from 2018 to 2025.

Acquisition Terms And Financials

Nasdaq didn’t disclose the acquisition price and terms and didn’t file a Form 8-K, so the deal was likely for a financially non-material amount.

Management also didn’t provide a change in financial guidance as a result of the transaction.

A review of the firm’s most recent published financial results indicate that as of December 31, 2019, Nasdaq had $454 million in cash and short-term investments and $8.3 billion in total liabilities of which $3 billion was long-term debt.

Free cash flow for the twelve months ended December 31, 2019 was $836 million.

In the past 12 months, Nasdaq’s stock price has risen 26.1% vs. the U.S. Capital Markets industry’s fall of 6.5% and the U.S. overall market index’s drop of 3.2%, as the NDAQ chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive in eleven of the last twelve quarters, as the chart shows below:

Source: Seeking Alpha

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure	Amount
Market Capitalization	$17,280,000,000
Enterprise Value	$20,600,000,000
Price / Sales	4.05
Enterprise Value / Sales	4.83
Enterprise Value / EBITDA	15.53
Free Cash Flow [TTM]	$742,130,000
Revenue Growth Rate	-0.35%
Earnings Per Share	$4.63

Click to enlarge

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $80.70 versus the current price of $101.05, indicating they are potentially currently overvalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

NDAQ acquired Solovis to broaden its portfolio analysis and monitoring capabilities within its eVestment offering.

As Nasdaq stated in the deal announcement:

Solovis gives sophisticated investors a unified line of sight into their portfolios, performance and risk across asset classes. For the 600+ institutional investors that rely on eVestment today for manager screening, Solovis provides complementary power for ongoing portfolio management.

So the acquisition is really about providing investment managers a more unified view of portfolio activity, whether with publicly held or private companies, and across all general partner types.

The investment management software market is expected to grow at a reasonably fast rate in the coming years, especially for the financial services industry.

We don’t know how much Nasdaq paid for Solovis, although I suspect it was acquired on a ‘team and technology’ basis rather than on a revenue basis, so the deal was likely for under $50 million.

NDAQ is down 14% so far from the sell-off due to coronavirus impact fears.

We currently have no real way to forecast or discount the impact of the pandemic on business activity over the next twelve months, so financial guidance based on previous communications from management is likely no longer relevant.

Given these uncertainties and an apparent market repricing of stock valuations, my bias on the stock at its current level of around $100 is Neutral.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.