By Alexander Osipovich
The revelation that the owner of the New York Stock Exchange approached eBay Inc. about a possible takeover -- only to dump the idea after an investor backlash -- stunned observers on Wall Street and beyond.
But it shouldn't be surprising given the transformation of the exchange business over the past decade. Once focused on running markets, exchange operators such as NYSE parent Intercontinental Exchange Inc., or ICE, have increasingly evolved into data and technology companies -- and the exploration of a deal with eBay suggests executives are intent on further transformation.
"Their core business is very slow-growing," said James Angel, a finance professor at Georgetown University. "That's why exchange operators have been on the acquisition prowl."
Companies like ICE, Nasdaq Inc. and London Stock Exchange Group PLC are now diversified multinationals. They don't just run marketplaces and invite VIPs to ring the opening bell. They sell data to brokers and hedge funds, they concoct indexes used by the $6 trillion global exchange-traded fund industry, and they sell trading technology. In other words, they try to be indispensable gears in the machinery of global finance.
A key reason behind that shift is that it isn't attractive to be a mere exchange anymore.
The traditional way exchanges made money was by collecting fees for transactions executed on their markets. But that has gotten tougher over the years, especially in stocks. The number of shares traded in the U.S. each year peaked in 2009.
Other markets, like futures, have enjoyed stronger volume growth, and futures exchanges are more shielded from competition than stock exchanges, so they can charge higher fees. But even for them, revenues from transaction fees swing up and down unpredictably with volumes, making them an unreliable driver of growth.
Hence the appeal of data sales. Not only has the rise of quantitative trading increased demand for all sorts of financial data, but exchanges generally sell data on a subscription basis, making it a more predictable revenue stream. That has led them to step up their offerings of pricing data, as well as related products like indexing and analytics.
In 2019, U.S. exchange groups made 26.3% of their net revenue from information services, up from 18.1% in 2014, according to Burton-Taylor International Consulting, a TP ICAP company.
For ICE, the share rose to 35.9% from 20.1% over the same period, according to Burton-Taylor. Much of that increase was due to Atlanta-based ICE's last major deal: its $5.2 billion acquisition in 2015 of Interactive Data Corp., a bond-data provider.
Mining eBay's marketplace for data appears to have been part of the thinking behind ICE's now-aborted pursuit of the e-commerce company.
On an earnings call Thursday, ICE Chairman and Chief Executive Jeffrey Sprecher repeatedly mentioned data when discussing his thinking about eBay.
"Our ability to handle massive amounts of data securely, efficiently, put it in a database, sort it, search it, manipulate it, cleanse it and give it back out to people is a core talent that we have here," Mr. Sprecher said when asked about how a consumer-facing business like eBay would fit into ICE.
ICE likes to think "outside the box" when considering possible acquisitions, he added.
Most big exchange deals in the past two decades followed a pattern: They bought other exchanges to amass scale and diversify into new markets.
ICE itself used that playbook to become a $50 billion empire. Besides the NYSE, its acquisitions over the years included the New York Board of Trade, featured in the 1983 Eddie Murphy comedy "Trading Places" as the site of a fictional manipulation scheme in frozen concentrated orange-juice futures.
But exchange deals have gotten tougher as the industry has consolidated, while regulators and national pride have foiled proposed cross-border transactions. In October, Hong Kong Exchanges & Clearing Ltd. dropped its bid to buy the London Stock Exchange, and the European Union in 2017 blocked a proposed merger between Deutsche Börse AG and London Stock Exchange Group.
ICE's approach to eBay wasn't the first time an exchange operator eyed opportunities in the consumer space. Nasdaq -- whose fastest-growing business is selling markets technology -- agreed last year to provide its technology to a U.K. soccer-betting platform.
But with eBay worth more than $28 billion, an ICE takeover of the company would have been an unprecedented foray into retail for an exchange operator that has mainly catered to banks, trading firms and corporate clients during its 20-year history.
Investors were flummoxed by the deal's potential price tag. They also questioned the wisdom of ICE acquiring an online marketplace that won fame in the 1990s as an auction site for Beanie Babies and other collectibles, but has since fallen behind rivals such as Amazon.com Inc.
Reflecting investors' displeasure, ICE's stock price fell as much as 13% in the days after The Wall Street Journal first reported on the overtures to eBay. ICE shares rebounded Friday, after the company abandoned its pursuit of eBay, but they are still down 7.4% from their closing value on Monday, the day before the news broke.
On the earnings call, Mr. Sprecher cited ICE's track record of making astute acquisitions and turning around underperforming assets. "We're not crazy," he told skeptical analysts.
Hours later, ICE said it was no longer pursuing eBay.
Write to Alexander Osipovich at firstname.lastname@example.org