Back in May, Intercontinental Exchange (ICE 0.18%) and Black Knight Financial (BKI) announced a deal in which Intercontinental Exchange would buy Black Knight for $85 share in cash and stock. The deal, valued at about $13 billion, would combine two of the biggest companies in the mortgage technology industry.
Since then, the mortgage origination market has collapsed and the government is raising antitrust issues about the transaction. Is the deal doomed?
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Both companies are major players in mortgage technology
Black Knight and Intercontinental Exchange are both large players in mortgage technology. Intercontinental Exchange is best known for owning the New York Stock Exchange, but it has been building a presence in mortgage technology as well. Intercontinental Exchange owns Ellie Mae, which includes the loan origination system Encompass. It also owns the Mortgage Electronic Registration System and Simplifile. These businesses don't originate mortgages per se, but they help mortgage originators assemble mortgages for sale to investors.
Black Knight is a mortgage technology company best known for its own loan origination system, Empower. Black Knight also owns Optimal Blue, which is a platform that allows originators to price and sell their loans. If Intercontinental Exchange and Black Knight merge, the combined company would have exposure to the entire mortgage origination value chain.
Washington is worried about the deal's effect on consumers
The House Financial Services Committee recently sent a letter to the Federal Trade Commission expressing concern over the deal, saying the combined company could "exert significant market power over loan pricing for consumers, access to and sale of consumer data, and mortgage software pricing." The fear is that the combined company would face little competition and raise prices, which would be passed on to borrowers. In this sort of situation, the government could demand that Intercontinental Exchange divest one of the loan origination systems to a competitor.
When the deal was announced, the mortgage origination industry was coming off of a record year courtesy of the Federal Reserve, which cut interest rates to the floor to stimulate the economy during the height of the pandemic. Mortgage originators feasted on easy refinance volumes, which disappeared once the Fed began hiking rates this year to battle rising inflation. Mortgage origination is a highly cyclical, feast-or-famine business, and times are exceptionally tough right now.
Several notable originators have filed for bankruptcy, and employment in the industry has plummeted. The financial logic of the deal may no longer make sense given the current environment, and an antitrust lawsuit may be Intercontinental Exchange's excuse to terminate the deal.
The downside for Black Knight is probably limited
If the deal falls apart, Black Knight shares could sell off. However, the stock is trading well below the announced deal value of $85 per share at about $59, and there wasn't much of a takeover premium to begin with. This is a recognition of the antitrust risk of the deal and the likelihood that the agreement collapses. Mortgage companies are already under intense selling pressure -- Rocket and UWM Holdings are among the most-shorted stocks in the market right now.
If the deal unravels, then both companies would continue as before. Black Knight is still the market leader in servicing software and Optimal Blue is highly popular with mortgage originators. Mortgage technology is still dwarfed by the exchanges business for Intercontinental Exchange, so the impact there should be minimal. If the deal doesn't happen, Black Knight will probably get dented in the short term and Intercontinental Exchange should fare better given that its exchanges business is still doing well.
