Nasdaq to Purchase FTEN - Analyst Blog

Expanding its risk management solutions, yesterday, Nasdaq OMX Group Inc. (NDAQ) announced its agreement to acquire leading real-time risk management solutions provider, FTEN Inc., for an undisclosed amount. Besides, while other terms of the deal are yet to be revealed, it is expected to be closed by the end of this month.

FTEN is jointly owned by Goldman Sachs Group Inc. (GS), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Credit Suisse Group AG (CS).

Based in New York, FTEN provides a systematic solution to trading risks and helps the brokers notice and control such risks, thereby providing a smooth trading and clientele performance. These checks can well be made at all levels of trade, i.e., at the pre-trade, at-trade and post-trade level.

Moreover, the latest US regulations require the trading firms to have their trades monitored by security firms in order to prevent any breach of regulations and wrongful transactions. Hence, these security firms have, of late, gained in importance.

As a result, Nasdaq has been vigorously pursuing meaningful acquisitions in order to attain a high-grade risk management solution in real-time for its trading systems. In this regard, the company had also acquired SMARTS Group, the world-leading technology provider of market surveillance solutions to exchanges, regulators and brokers, in July this year.

The FTEN and SMARTS Group acquisitions are part of Nasdaq's strategy to diversify its Market Technology business and enter the broker surveillance and compliance market. These acquisitions complement well with Nasdaq's extensive trading platform, where continuous monitoring and keeping a consolidated audit track is mandatory to avoid any erratic trading session.

Estimate Trend Revision

Over the last 30 days, four of the 18 analysts covering the stock have lowered their estimates for the fourth quarter of 2010, while no upward revisions were witnessed. Currently, the Zacks Consensus Estimate for fourth quarter is operating earnings of 51 cents per share, an estimated 11.0% rise from the year-ago quarter.

The higher number of downward estimate revisions for the fourth quarter indicates a likelihood of downward pressure on the performance of the stock in the near term. These could be attributed to acquisition-related costs that the company has to bear.

With respect to earnings surprises, the stock has been almost steady over the last four quarters, with three positive surprises. The average remained positive at 2.63%. This implies that Nasdaq has surpassed the Zacks Consensus Estimate by 2.63% over that period.

The FTEN acquisition and the possession of SMARTS Group will enhance Nasdaq's operating efficiencies and provide competitive advantages against arch market rivals, primarily NYSE Euronext Inc. (NYX), which owns a prominent share in the exchange industry.

Overall, we believe that Nasdaq's decision to acquire FETN appears to be a good fit in the company's product basket, although related expenses could weigh on the margins in the near term. This is also reflected by Nasdaq's increased expense guidance for 2010.

 
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