Please ensure Javascript is enabled for purposes of website accessibility

Maybe Not eBay, But Intercontinental Exchange Still Needs a Deal

By James Brumley - Feb 18, 2020 at 11:46AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The exchange, parent to the NYSE, is finding it tougher to make the acquisitions that have historically driven growth.

The New York Stock Exchange's parent decided it didn't want to acquire eBay (EBAY -3.94%) after all. But, even without pulling the trigger, Intercontinental Exchange (ICE -3.14%) sent a message that it's looking to make deals ... and struggling to find any that work. More tacitly, the company delivered a veiled message about the kind of purchase it's looking to make, in an environment that's proving increasingly restrictive.

Not completely crazy

Plenty of investors were relieved. While the prospect of a capital-markets player acquiring the online auction site was exciting to eBay shareholders when The Wall Street Journal first reported the possibility on Feb. 4, analysts and investors alike were struggling to identify Intercontinental's upside in such a deal. Few observers were truly surprised when Intercontinental CEO Jeff Sprecher explained during an earnings call two days later: "Curiosity, and the fact that we know people there, led us to open a dialogue. And that's kind of the end of the story."

One businessperson hands another a sheaf of paper money.

Image source: Getty Images.

For its part, eBay was "not interested" either, indicating that its revitalization plans would be best realized by taking a different path.

But a closer look at both companies reveals a certain sort of synergy most investors could easily overlook. Chief among them is eBay's capacity to connect capital with companies. Yes, the NYSE and other exchanges owned by Intercontinental technically already do this. With the advent of crowd-sourced loans, user-created alternatives to currency (like bitcoin), and peer-to-peer payments that bypass banks, though, traditional dividing lines are being blurred. It wouldn't be unthinkable that eBay and stock exchanges could have a future together.

Allan D. Grody, who is president of consultancy Financial InterGroup Advisors, suggests that eBay could be a sort of fundraising platform for small companies that need capital but don't want a full-blown exchange listing. He wrote recently in The Hill:

Small merchants can be offered both a merchandising and capital raising platform. As these firms grow using eBay's selling platform, its sales can be monitored to a point where its revenue and profits are recognized. Exclusively for eBay platform users, the firm's shares (or a contract to buy its shares at a future date, or the issuance and sale of shares through an ICE platform) can be made contingent on the company achieving sales targets.

Alas, that's not happening now, but never say never.

Handcuffed in the meantime

There's also the additional argument that Intercontinental Exchange simply needs acquisitions to grow, and is running out of ways it's allowed to do so within the capital-markets sector. Entering the consumer market would open lots of doors.

The NYSE and other exchanges have been at odds with the Securities and Exchange Commission for years, for a variety of reasons. Most recently, the NYSE has disputed the SEC's argument that an exchange can't simply raise fees without a detailed explanation as to why.

Another point of contention is that the SEC is relatively restrictive when it comes to the creation of new products, or dealmaking that could potentially quell competition within the industry. Even selling data can run afoul of the SEC, leading Sprecher to lament last year that "there doesn't seem to be a quick resolution unless the industry wants to come together and figure out how to allow innovation around those [data] products, which may or may not happen."

The net effect: The NYSE's parent faces a growth headwind. Growth in trading alone won't satisfy investors, but intra-industry acquisitions and new products will certainly dissatisfy regulators. While eBay was an interesting solution to the problem, it was perhaps too far away from ICE's core competency.

Something in the payment space

The predicament leaves Intercontinental Exchange in a tight spot, though not an impossible one. The most palatable prospect from here -- to investors as well as regulators -- is something in the payment space.

ICE has already launched a cryptocurrency exchange platform called Bakkt and supports retailers that accept it as a form of payment. Right after news broke that Intercontinental Exchange might buy eBay, in fact, it did acquire Bridge2 Solutions, augmenting Bakkt by allowing merchants to cultivate loyalty programs around cryptocurrency spending.

This focus doesn't inherently mean the company's next deal will be payments-related or consumer-oriented. But given all the facts (including Sprecher's willingness to admit he even spoke with eBay's executives), it's pretty clear ICE is working very hard to find something along these lines. It's just struggling to find the right one.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intercontinental Exchange, Inc. Stock Quote
Intercontinental Exchange, Inc.
ICE
$96.01 (-3.14%) $-3.11
eBay Inc. Stock Quote
eBay Inc.
EBAY
$45.07 (-3.94%) $-1.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
349%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.