FXCM has released the slide deck for its upcoming conference call where the broker will explain the details and benefits of its proposed acquisition of rival GAIN Capital. The presentation provides a transaction overview, benefits to GAIN Capital shareholders and clients, and challenges for GAIN if it remains a standalone company.
In terms of shareholder benefits, FXCM is making the case that a merger would lead to significant operating synergies which could lead to $80-$100 million additional cash. Based on this projection they expect the deal to be accretive to earnings for 2014. They also added that the combined brokers would experience “improved balance sheet strength, liquidity, and trading characteristics”.
As highlighted in their previous press release, FXCM is offering $5.35/share, which is a 25% premium to yesterday’s closing price of GAIN Capital. In the combined company, GAIN shareholders will assume 12.8-16.2% ownership (depending on how much cash is elected to be received by shareholders). The share portion is 0.3996 shares of FXCM stock.
In regards to GAIN shareholders, FXCM is arguing that at $5.35, the offer price is above GAIN’s 52 week high of $5.19 and 80x their 2012 net income. They added that GAIN ‘currently faces operation and financial difficulties due to its scale’ which would be enhanced through the merger. Also, the EPS accretion could lead to greater stock appreciation in the future.
For FXCM shareholders, the broker explains that stock owners will benefit from the EPS accretion and improved economies of scale due to a 36% increase in revenues and 28% gain in FX client equity. In addition, the combined FXCM and GAIN brand names could ‘enhance overall marketing presence’ (editor’s note – the marketing advantage could over the long run provide the greatest synergies, as GAIN’s ownership of the forex.com domain provides one of the most cost effective CPC keywords – combined with FXCM’s DailyFX site, the two firms have a massive marketing reach that could be operated more efficiently, after removing overlaps)
In relation to GAIN clients, FXCM is presenting additional choices as an advantage. Clients would be able to choose either the market making or STP account and access to DailyFX trading signals. In terms of platform’s, FXCM stated that GAIN clients will have access to FXCM’s proprietary and MT4 platform. While not saying it outright, it appears that clients will be expected to migrate to FXCM’s platforms (more info should be available on this point after the conference call)
Last, FXCM stated that as a standalone company, GAIN will face “insufficient scale in any of its three principal markets to deliver consistent results”, “pending and potential adverse regulatory changes”, “limit free cash to execute long term strategies”, and “lack of liquidity”.
Overall, this game appears to just be getting started. Based on initial reaction from industry executives, the contents of the FXCM presentation (such as GAIN’s ownership of 16.2% of the combined stock, while provide over 30% of revenues), and GAIN’s depressed stock price, the deal is viewed as hostile. In addition, rather than communicate with management, FXCM has taken the rhetoric directly to shareholders.
As such, we would expect that FXCM will probably need to sweeten its offer to convince shareholders to vote in favor of the deal. Also, they seem ready to do as much as they stated “We are highly motivated and prepared to move quickly towards a successful transaction.”