In a move that will take it another step closer to total independence from its parent company, the National Association of Securities Dealers (NASD), the Nasdaq stock market earlier this week inked a $240 million private equity deal with San Francisco-based firm Hellman & Friedman.
The investment is Nasdaq?s first commitment from a non-affiliated firm, and is part of the NASD?s ongoing effort to divest its interests in the market, as well as enact a massive restructuring designed to ultimately transform it from a not-for-profit organization to a for-profit, investor-owned entity. The NASD has sold 72.4% of its ownership in Nasdaq since last June, 62.6% of which was purchased through private placements from investors in its member group, including broker-dealers and companies whose shares trade on the exchange. The NASD ultimately plans to sell the 27.6% of Nasdaq it still owns, although it currently has no rigorous timeframe or strategy for doing so, a Nasdaq spokesman said.In return for its investment, Hellman will receive a five-year convertible bond, that, if converted, would give it a 9.8% ownership stake in Nasdaq. Warren Hellman, the firm?s chairman, has taken a seat on Nasdaq?s board as part of the transaction.
Previous investors put up a combined $516 million with warrants that, if exercised, could outfit the issuer with an additional $627 million over the next five years. Most of those proceeds will go toward financing Nasdaq?s so-called global expansion, which presently includes a proposed alliance with the struggling pan-European Easdaq exchange and its Nasdaq Japan project, which is operating as a new section of the Osaka Securities Exchange.
Conflicting reports from the Wall Street Journal and the New York Times this week pegged Nasdaq?s post-money valuation following the Hellman investment somewhere in the neighborhood of $1.9 billion and $2.4 billion, but the Nasdaq spokesman declined to confirm either figure.
“These are private transactions, so we?re not releasing specific numbers,” he said. “I can tell you that they?re missing something on the analysis because [Hellman] initially got convertible debt, not equity, and there will be interest on that debt that wasn?t taken into account.”
Good Company, With All The Trimmings
Nonetheless, Nasdaq seems to have all the makings of what?s considered a viable investment opportunity in VC circles these days.
“Although Nasdaq?s history as a for-profit organization is only six months old, they?re already one of the best businesses out there,” said David Tunnell, a principal at Hellman. “In general, they have a secular growth wind at their back and, in particular, with Europe and other product lines, they have specific growth opportunities that are interesting to us. “In addition, they?re at an important point of transition and inflection as they mature into a for-profit organization, and we?re catching them at that point.”
Additionally, it?s profitable, which is a key investment criteria for VCs in today?s less-than-desirable market landscape. Moreover, Nasdaq is a leader ? almost a household name, really ? in the world of global securities exchanges. Nasdaq posted $800 million in revenue last year, a third of which came from fees related to new and continued listings on the market, and the remaining two-thirds of which came from trading and providing market data.
However, the Nasdaq?s 25% retreat so far this year may mean that, going forward, revenue from listings will be lower as companies are less apt to offer shares in a down market. Still, the market?s woes have not slowed trading volume. Last year, the Nasdaq saw average daily volume of 1.75 billion shares a day, a new record for the exchange. In 2001, trading volume is already up 20% from last year, with an average of 2.11 billion shares being moved each day.
Hellman invested in Nasdaq from its $2.2 billion Hellman & Friedman Capital Partners IV LP vehicle, which closed in January 2000. The Nasdaq investment is the firm?s fourth from the fund since last February. It shares a place in Fund IV?s portfolio with the likes of Upromise Inc., an online service that enables parents to save for their children?s college education, and Formula One, the racing car company. In fact, the firm has earned a 400% return in six months on a 38% stake in Formula One.
In any event, Hellman is no stranger to investing in companies or organizations in a state of flux. In 1996, the firm pumped $225 million into Young & Rubicam Inc., a global marketing and communications agency. When Hellman came on the scene, the 90-year-old-plus company was in the midst of sorting through some internal strife before taking the company public.
With Hellman?s help, however, Young & Rubicam pushed out an IPO in 1998, and has since been acquired by WPP Group PLC, one of the world?s largest multinational marketing and communications firms.
Like Young & Rubicam, Nasdaq needs guidance in the areas of corporate governance, finance, strategy and international expansion, and Hellman is charged with helping the exchange make a smooth transition to becoming an independent entity fully-owned by its investors.
Additionally, Hellman will be involved in facilitating any other private placements or capital-raising events Nasdaq decides to do in the future, Tunnell said.
To IPO Or Not IPO?
One burning question that?s still being debated is whether or not Nasdaq will eventually do an IPO of its own. While both Tunnell and the Nasdaq spokesman were mute on this subject, there?s reason to expect it will happen at some point.
First, Hellman?s previous experience with Young & Rubicam and its subsequent IPO success story certainly suggests that Nasdaq could be preparing for its own offering by bringing the right advisors into its court as a safeguard for if and when it decides to shed its privately-held status.
Furthermore, within the past month, Nasdaq has set up a committee to weigh the pros and cons of taking the organization public. The panel, headed by Frank Baxter, chairman of Jefferies Group, is expected to release its findings by mid-year, the Nasdaq spokesman said.
On one hand, going public would be good for Nasdaq, because it would create liquidity for its 2,900-plus investors. On the downside, however, concerns abound throughout the organization that a stock market that spends millions of dollars on technology on an annual basis may not be looked upon favorably by public investors unfamiliar with its spending practices.
“We have to consider the question, is a stock market subject to review by public investors on a quarter-by-quarter basis the best method of running such a marketplace?” the Nasdaq spokesman said. “Investors who are familiar with us see our [technology spending] as a valuable way to sustain our business, but would public shareholders see it that way?” Clearly, the jury is still out on that question.
Moreover, the private placements Nasdaq has recently completed are essentially cash-neutral transactions, as the exchange has used the capital to buy up shares from the NASD and reduce its ownership.
“[With the Hellman transaction], we have a charge on our books of $240 million on a 4% coupon, but there is less stock outstanding,” the spokesman explained. As these transactions have not added to Nasdaq?s capital position, it may be necessary for it to turn to the public markets at some point to bolster its war chest.
Having only just signed onto Nasdaq?s investor roster, however, Tunnell said Hellman isn?t overly concerned at this point with an exit strategy. “The theme we espouse is, the exit is never a problem when you invest in great businesses, and Nasdaq is one of the best,” he said.
Robyn Kurdek can be contacted at Story Feedback.