ICAP, the inter-dealer broker, has completed its acquisition of the majority of BrokerTec’s trading operations from the fourteen investment banks that founded it. The acquisition, which was announced in January this year but initially agreed between the parties two years ago, was delayed by a lengthy review initiated by the US Department of Justice, which has now received the assurances that enabled it to clear the deal.
It was completed for a total consideration of 180 million, though the final number will be dependent upon the first year revenues earned by the acquired business. At the market close on 22 April 2003, the initial payment was valued at 115m ($182m) with the deferred consideration valued at up to 65m ($102m).
ICAP, itself the product of the merger of Intercapital and Garban in September 1999, will now own roughly half the US Treasury market – a market share which prompted the Justice Department to insist that ICAP give up a “non-compete” agreement with the investment banks that owned BrokerTec. Ironically, it was competition concerns that prompted the Justice Department to persuade the investment banks to sell BrokerTec. As Michael Spencer, the founder and CEO of ICAP, told the Financial Times this morning, BrokerTec was “not an entrepreneurial organisation ; it was a club really.”
The task now facing ICAP, which has grown rapidly from an 80,000 start-up in 1986, is to integrate the voice-broking technology of ICAP (ETC) will now be integrated with the electronic technology of BrokerTec.
ICAP is a FTSE-250 company listed on the London Stock Exchange, with a market capitalisation of circa 990m (US$1.5 billion) has raised the funding through an issue of new shares. 11,989,509 ICAP ordinary shares, representing the initial consideration for BrokerTec, were today admitted to the Official List and to trading on the London Stock Exchange.
BrokerTec was formed by a consortium of five banks at the height of the Dot Com boom in January 1999. It now has fourteen institutional shareholders – namely, ABN AMRO Bank N.V., Barclays Electronic Commerce Holdings Inc., Banco Santander Central Hispano, S.A., Credit Suisse First Boston Next Fund, Inc., DBAH Capital, LLC, Dresdner Kleinwort Wasserstein Online Ventures Limited, The Goldman Sachs Group, Inc, Greenwich Capital Financial Products, Inc., JP Morgan Partners (BHCA), L.P., LBI Group Inc., Merrill Lynch L.P. Holdings Inc., MSDW Fixed Income Ventures Inc., Citigroup Financial Products Inc and UBS (USA) Inc.
“Our acquisition of BrokerTec creates the strongest combination: the world’s leading interdealer voice broker and one of the world’s leading electronic brokers of fixed income securities,” says Spencer. “There will be significant synergies as well as offering customers improved access and liquidity across a wide range of fixed income markets. After almost two years of negotiations our technical and commercial teams can now get on with the integration of the BrokerTec and ICAP fixed income businesses. During the integration period our customers will continue to have uninterrupted access to electronic broking of BrokerTec and ETC products together with voice broking of all other products.”
In the year to 31 December 2002 the BrokerTec businesses being acquired had revenue from electronic broking and data sales of $99.4 million and generated a profit (before tax, exceptional items and goodwill amortisation) of $20.5 million. At 31 December 2002 the BrokerTec businesses being acquired had pro forma net assets of $50 million.
ICAP says the changes agreed with the Justice Department are not expected to have any material financial effect on the acquisition. The number of instruments covered by the revenue commission agreements has been reduced and the aggregate of the minimum commission and cap have consequently been adjusted downwards from $61.3 million and $97.6 million respectively to $40.6 million and $71.5 million respectively. The instruments which are no longer part of the revenue commission agreements include US Agency securities, US Treasury bills and US Treasury off-the-run coupons. The minimum commitment will remain in place for 3 years.
Three further changes have been agreed: BrokerTec Global L.L.C. will no longer nominate a director to the board of directors of ICAP plc; the removal of a non-compete provision that prevented any group of three or more BrokerTec shareholders from taking an equity interest in a new electronic trading platform that anonymously matched US Agencies securities, US Treasuries, and certain other fixed income securities for three years; and the removal of a most-favoured-nation clause requiring ICAP to offer BrokerTec’s shareholders the lowest per-unit commission cost available to any ICAP customer