Nasdaq (NDAQ) to Buy Verafin, Eyes Anti FinCrime Leadership

Nasdaq NDAQ has agreed to buy Verafin for $2.75 billion in cash in its bid to evolve as a leading SaaS technology provider. The transaction, pending approvals, is expected to see light in the first quarter of 2021.

About Verafin

Based in St. John’s, Newfoundland and Labrador, Verafin, an industry pioneer in anti-financial crime management solutions, was established in 2003. The company provides a cloud-based platform to detect, investigate, and report money laundering and financial fraud to more than 2,000 financial institutions in North America.

Its organic revenues are expected to witness a four-year (2017-2020) CAGR of 30% while 2020 non-GAAP EBITDA margin is estimated to be 26%.

Deal Financing

Nasdaq intends to finance the deal with a combination of cash and $2.5 billion of debt. The company estimates debt to non-GAAP EBITDA leverage to be about 3.9X pro forma for the transaction but expects to improve the leverage over time. Nasdaq remains committed to its existing capital deployment plan that also includes dividend payouts and share buybacks.

Valuation represents about 19.5x 2021E revenues, in line with other leading SaaS companies.

Rationale of the Acquisition

The combination of Verafin’s expertise with Nasdaq’s reach and established regulatory technology leadership will help the latter to establish itself as a leader in Anti FinCrime. Nasdaq noted that Anti FinCrime is a $12.5 billion segment expected to grow at 17% through 2024. Thus, such strategic investment will ramp up Nasdaq’s growth trajectory. Recently, the Market Technology business of Nasdaq inked a partnership deal with Caspian to boost business growth in the financial crime market vertical.

The company expects the acquisition of Verafin to increase revenue contribution from the highest-growth Market Technology and Investment Intelligence segments to about 47% of third quarter of 2020 total net revenues. Concurrently, with higher contribution from annual recurring revenues (ARR) and SaaS, Market Technology medium-term organic revenue growth is estimated to be in the range of 13%-16% compared with 8%- 11% guided earlier. The acquisition will also expand the percentage of Nasdaq’s ARR coming from SaaS products and services.

This apart, Nasdaq raised Solutions Segments medium-term organic growth outlook to 6-9% from 5-7% guided earlier.

The buyout consolidates Nasdaq’s existing regulatory technology and anti-financial crime solutions, which include Nasdaq Trade and Market Surveillance offering, its Buy-side Compliance product, as well as Nasdaq Automated Investigator for anti-money laundering.

The acquisition is expected to be accretive to operating earnings per share starting 2022, achieve an attractive internal rate of return, and generate required return on invested capital objectives.

Inorganic Growth

This Zacks Rank #3 (Hold) leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services has an impressive inorganic growth story. Nasdaq has grown meaningfully over the years through a number of strategic expansions. These acquisitions have helped the company gain direct access to the equities market in Canada, expand its technology offering, and fortify its Corporate Solutions business and improve its market surveillance techniques. The company’s acquisitions of eVestment, Cinnober, Quandl among others have enhanced its capabilities and been accretive to its results.

Shares of this Zacks Rank #3 (Hold) stock have rallied 16.5% year to date, outperforming the industry’s increase of 0.6%. Solid fundamentals should help the stock retain the momentum.

Stocks to Consider

Some better-ranked stocks from the finance sector include MarketAxess Holdings MKTX, PJT Partners PJT and Mvb Financial MVBF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MarketAxess surpassed estimates in each of the last four quarters, with the average earnings surprise being 2.71%.

PJT Partners surpassed estimates in two of the last four quarters, with the average earnings surprise being 42.38%.

Mvb Financial surpassed estimates in two of the last four quarters, with the average earnings surprise being 210.55%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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