Is this the beginning of Stock Broker Consolidation?

Published by Anjaney Vatsal on
13th Aug, 2015

A Comparative Analysis – Sharekhan Acquisition by BNP Paribas and Omnesys Acquisition by Thomson Reuters

The interesting fact is that what matters in the acquisitions is not before the deal but what happens after the deal!

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Why the Comparison?

 

Well, the two firms were surely picked up as they were in the news, but there are many stock broking firms that shut down quite recently. As per the data released by Securities and Exchange Board of India in the year 2013-2014 more than 450 brokers had shut down or quit from the industry. And it’s not just about the small firms but biggies like HSBC India in past decided to exit from Retail Broking business. Another recent news mentioning Sundaram Finance is selling its all 49 % stake in JV securities to BNP Paribas. Talking about the Indian subcontinent some key players like India Infoline in recent past had started targeting the higher-value clients cutting off the retail business and the Motilal Oswal group commented that now the business has become high on cost and low on returns and hence you may witness some consolidation in the industry. So the study is more about the industry taking the two players as a role model.

What each firm specializes in?

Just a bit of background about the firms and the field they specialize in the industry.

Omnesys Technologies

Omnesys Technologies which was founded in 1997 by Shrikant Pandit. Omnesys offers products that are market-leading sell-side order management system and has high-frequency trading capabilities. The firm also proffers software for securities market at global level. The wide array of products are efficient in supporting the multi-asset, multi-venue trading systems, also extending their solutions to provide buy side and sell side connectivity, market data and consumer-oriented trading websites and terminals. The firm main offering NEST Trader is an intuitive front-end solution that connects to a robust backend server to fetch market data, execute orders and facilitate trading.

Thomson Reuters

Thomson Reuters Corporation is the main multinational mass media and information firm founded in Toronto and based in New York City and Toronto and his presence in India has been since 1851. The Thomson Corporation acquired Reuters Group PLC to form Thomson Reuters on April 17, 2008. The firm offers a range of products and services from financial, legal, compliance sector to Accounting and Pharmacy and Life Sciences, all at the global level. As per the Wikipedia source, they have acquired a lot of firms since July 2009 with the sole purpose of expanding their profile and entering other geographies.

Sharekhan

Sharekhan is a web based online portal for online trading, investments, and stock marketing. Shripal Morakhia, the founder of the company, made his debut in Feb 2000. In terms of client base, the firm was ranked as third largest stock broker portal after ICICI Direct and HDFC Securities and currently has its branches in 575 cities in India with total user base of around 12 lakh. Sharekhan is India’s leading broking house providing services for easy online trading, research to wide array of financial products

BNP Paribas

BNP Paribas a French Bank and a financial service company with its headquarters in Paris, formed through merger of BNP (founded in 1848) and Paribas (founded in 1872) in 2000, provides a wide range of products and services related to Assets management, consumer banking, corporate banking, credit cards, investment banking, mortgage loans, private banking and wealth management. As per Wikipedia, for the year 2012 BNP Paribas was ranked third largest bank in the world in terms of the total assets around Euro 2 Trillions. Apart from offering the retail services, BNP Paribas is also one of the leading global investment banks. The major areas being Derivatives trading, structured finance and project finance. Captivatingly, BNP Paribas possess a large minority stake as a co-promoter of publically listed service company Geojit BNP Paribas. The firm offers the brokerage solutions to India and is also extending its presence in the Middle East. And interestingly the share prices of Geojit BNP Paribas jacked up by 13 % after the announcement of Sharekhan acquisition.

Competitors Other Than the Winner

 

Omnesys Acquisition by Thomson Reuters

Data not available

Sharekhan Acquisition by BNP Paribas

 

As per the business insider news, the joint teams of Warburg Pincus and General Atlantic or better to say Warburg-General Atlantic and few Indian Banks like IndusInd Bank were among the competitors list,in which the former gave a tough competition to the French bank.

 

Total Valuation

 

Omnesys Acquisition by Thomson Reuters

The actual value of the deal was not disclosed. However, the industry experts nail the deal to about 15-20  times its current revenue [40 to 50 cr annual as projected for FY13-14]

Sharekhan Acquisition by BNP Paribas

 

Again, the actual value of the deal was not disclosed. However, the experts evaluate the deal to be 2000-2300 crore deal.

How does it benefit the Acquirer?

 

Thomson Reuters

  1. Makes it easy for expanding their operations in India
  2. With acquisition of Omnesys, Thomson Reuters could extend their market data feeds services to the Indian audience
  3. Integrating the high frequency trading capability with Thomson Reuters content, analytics, quant and event-driven trading infrastructure, they could offer a more diverse and innovative solutions tailored as per the market trends, would help them in walking that extra edge.

 

BNP Paribas

  1. Makes it easy for expanding their operations in India
  2. Unlike earlier as Sharekhan was purely a brokerage firm, they would now integrate and offer a widespread range of products from pure brokerage to asset-based investment services including mutual funds and savings products.

 

How does It benefit the Acquiring Party?

 

Omnesys & ShareKhan

 

Both the firms have an added advantage of expanding and representing their products at the global level with good money back up.

 

The Debate -Is this the initialization of Stock Broker Consolidation?

 

With these deals signing off again the debatable topic has been triggered – if it’s the beginning of consolidation of stock brokers?

Some of the key findings

  1. Tax and advisory firm Grant Thornton reported that year 2015 has seen a decline in the number of mergers and acquisitions reported in India. In the first half of year 2015 a total of 277 deals worth of USD 15.8 billion have been executed. However in year 2014, deals worth of USD 17.1 billion  were signed in first six months.
  2. The cross border M&A as per the data available by by Thomson Reuters for 2011 has seen a decline
  3. Talking about options trading is a pretty low-yield business for brokers but accounts almost 75 percent of equity derivatives
  4. Even the ICRA report of 2013-H2 indicated that industry is witnessing the signs of consolidation

The Causes Of Consolidation

  1. The main motive of financial or stock consolidations are revenue enhancements and cost savings just as we saw for the above two cases
  2. The factors driving the consolidation are financial deregulation, information technology, globalization of financial and real markets and most importantly enhanced pressure of shareholders for financial performance. One of the prime example is the euro acceleration through consolidation as per the CA Report and Ireland economy report
  3. The major roadblocks to let consolidation happen are cultural differences at national and corporate level and most significantly the regulatory practices operating within the countries

 

The “AGAINST”

For the big firms, the acquisition could be an efficient cost management strategy as the equity broking commissions are currently under great pressure due to soaring competition. Another reason for the large corporate houses to invest time and money in India is patrons in India are built solely on personal relations and no one can guarantee that the same would stick to the firm after the acquisition.

Blame it on the lack of market growth or pressure on yields, the broking industry is quite at a tight spot.. The Large fish/brokers are sailing on the tide with the help of automation in the business model. The small brokers make the use of their charm to build the rapport and get business. The ones that are mainly in crisis are mid-sized broker firms, who need cash flows.

In recent past few of the high-profile deals that were witnessed includes HSBC buying IL&FS Investsmart, Aditya Birla taking over Chennai-based Apollo Sindhoori, Standard Chartered Bank acquiring UTI Securities and Edelweiss Securities buying Anagram Securities. But were these deals successful, no one knows!

The “FOR”

A very recent study done by KPMG along with Mergers & Acquisitions magazine of more than 1000 executives revealed the fact that – more than about half of executives said they would be the “Acquirers” in year 2014. And in response to the question of what would be the motivating factor the answer was geographic reach [17 %], entering into new line of business [15%] and expansion of the current client base [13 %].

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A recent finding by Bloomberg on Broker Consolidation expose the hard reality that market needs better algorithms, better workflow integration and better insight and education. The pre and post trading tools are to be based on real time scenario providing total transparency to the TCA. Buy-side traders are under immense pressure in the marketplace and anticipate their agency brokers to add value to the trade, provide them with high-quality market intelligence and innovative technology R&D to help enhance their performance. And this would all be a possibility with consolidation as the budding startups get exposed at the global platform and the branded ones back them up with money, research and innovative technologies attracting there loyal customers or clients who go by brand name.

In another article in Forbes, it was concluded that the industry might soon view the struggle of survival of brokers, but the bright side of it would be innovation in the offerings – the investment product would be more like DIY so may be based on your historical investments or a quick five minute questionnaire could reveal if the individual is risk averse or risk neutral and then proposes the offerings rather than being channelized by a broker/advisor. Or may be simulation and artificial intelligence taken up to next level offering customized products as an advisor may do.

Consolidation is here to Stay -The Verdict

 

No matter what reason is being portrayed for executing the acquisitions and how much worth a million dollar deal is signed, the bottom line is crystal clear – Consolidation in financial industry is here to stay and for good reasons. As it surely helps in expanding the business, both parties have their requirement of either luring the new client or monetary backup to expand and represent globally.


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1 comment

  1. good stocks to invest July 3, 2016 at 6:39 pm

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