What happened
Nasdaq (NDAQ -0.28%) had a bumpy ride this week, its share price plummeting 9.6% as of Friday morning at 9:30 a.m. ET, according to S&P Global Market Intelligence. Nasdaq was trading at about $52 per share at the market open on Friday, down about 15% year to date.
It dropped in what turned out to be a solid week for the markets as the S&P 500 had gained 3%, the Dow Jones Industrial Average had climbed 1.6%, and the Nasdaq Composite had jumped 3.9% this week on Friday at the opening bell.
So what
Nasdaq, the company that runs the Nasdaq stock exchange, made a big splash this week, announcing on Monday that it was acquiring Adenza, a software company that offers risk management and regulatory compliance services for companies. In other words, it tracks companies' spending and makes sure they're in compliance.
Nasdaq bought Adenza from software company Thoma Bravo for $10.5 billion, making this the biggest acquisition (in terms of price) in the company's history. That turned out to be the rub, as some analysts and investors thought Nasdaq, which already has significant long-term debt, overpaid for this company.
The move sparked a sell-off, and the share price dropped some 10% after the news came out, down to below $50 per share.
Now what
Purchase price aside, the acquisition itself is part of Nasdaq's strategy to expand its offerings beyond the stock exchange to give itself multiple revenue streams and provide some stable income. The stock exchange business can be pretty volatile.
"This is an exceptional opportunity to acquire a leading software company that enhances Nasdaq's position at the heart of the global financial system," said Adena Friedman, chair and CEO of Nasdaq.
Adenza is expected to generate about $590 million in revenue this year, with 15% organic revenue growth and 18% annual recurring revenue growth. Also, the company has a loyal clientele, boasting a 98% gross retention rate with 80% recurring revenue. It should boost revenue for Nasdaq's Solutions Businesses from 71% of total revenue to 77%.
While the debt is a concern, this looks like a good business and a strategic fit, and with the extra revenue along with the already high margins and operating cash flow, Nasdaq should be able to handle it and prosper. This is actually a pretty good time to consider buying Nasdaq stock, as the forward price-to-earnings ratio is down to 18 after the sell-off.
