Deutsche Börse to Acquire Risk Analytics Provider Axioma

Deutsche BÖrse has agreed to acquire Axioma, a New York-based company noted for its cloud-driven, multi-asset-class portfolio and risk management technology and customer base of more than 400, including leading asset managers and asset owners in the U.S. and abroad.

According to the companies' April 9 announcement and a conference call with top Deutsche BÖrse executives the following day, Axioma is to join forces with DAX and STOXX - the exchange operator's index businesses, valued at €2.6 billion - in a new company described as a “fully integrated, leading buy‐side intelligence player that will provide unique products and analytics to meet the growing demand for an end‐to‐end platform.”

The price tag for the deal, which is expected to close in the third quarter, is $850 million. Contributing to the financing, and entering into a strategic partnership, growth equity firm General Atlantic will invest $715 million in the new company, which will be led by Sebastian Ceria, founder and CEO of 240-employee Axioma. General Atlantic is expected to end up with a 19% stake in the venture, and Deutsche BÖrse with 78%. Axioma management, by reinvesting around $105 million from the sale proceeds, will hold the remaining 3%, the announcement said.

“The union of Axioma, STOXX and DAX under the Deutsche BÖrse umbrella creates a growth company that is uniquely equipped to help clients capitalize on the critical trends now reshaping the investment-management landscape,” Ceria said in a prepared statement. “The combination of STOXX's indexing expertise with Axioma's best‐of‐breed analytical capabilities in risk management, portfolio construction and performance attribution is expected to result in strong near‐term revenue synergies and creation of a platform for future growth.”

Value Accretion

Speaking on the investor call along with Deutsche BÖrse chief executive officer Theodor Weimer and chief financial officer Gregor Pottmeyer, Stephan Leithner, the executive board member responsible for Post-Trading, Data & Index, stressed the complementary and synergistic nature of the acquisition. Estimated annualized pre‐tax revenue and cost synergies are €30 million by end‐2021. In terms of “value accretion,” average annual growth of the new company's equity value of more than 15% would result in at least a doubling of its valuation, to some €6.6 billion, in 2024.

The Germany‐based executives said they expect to be in a stronger position to capitalize on trends such as the growth in passive strategies, demand for smart beta and factor investing, and index customization. Axioma clients are seen benefiting from closer integration with data from a leading family of indexes, while DAX and STOXX clients would benefit from Axioma analytics that allow for creation and testing of custom indexes.

Leithner noted that Deutsche BÖrse, with its strong index footprint in Europe, would gain from Axioma's U.S. presence and connections on the buy side. (Axioma's customer breakdown is about 80% buy‐side and 70% U.S., according to Deutsche BÖrse's presentation.) He spoke in terms of a “future-proof” business building on Axioma's technology strengths - it was an early adopter of cloud computing - and “ability to continuously innovate.”

Said Deutsche BÖrse CEO Weimer: “This transaction is a step change for our pre‐trading business and fully in line with our Roadmap 2020 strategy, which besides organic growth builds on programmatic M&A and new technologies. We are also excited about the partnership with General Atlantic and believe it will help to further accelerate growth of the combined business and to achieve strong value creation.”

A next step on the M&A front was reported April 10 when Deutsche BÖrse said it was in “concrete negotiations” to buy certain foreign exchange businesses - Reuters specified the FXall trading platform - from Refinitiv.

Double‐Digit Growth

It was disclosed that Axioma had about $100 million in annual contract value (ACV) revenue in 2018, and ACV has increased at a 23% compound annual growth rate since 2010.

Deutsche BÖrse said it is the No. 4 global index player, and its EURO STOXX 50 is the No. 1 European tradable index. The index business on a stand-alone basis posted €168 million in gross revenue and €115 million in EBITDA in 2018 and has grown at double‐digit rates over the past five years.

The two companies have had an existing partnership since 2011 and have jointly developed factor indexes and ETF products.

Gabriel Caillaux, managing director and head of EMEA at General Atlantic, said, “We have closely followed the development of Deutsche BÖrse's index assets for many years as we witness the global shift to passive products and the rise of indexed investing strategies. We are excited to be partnering with such a renowned firm. We are also highly impressed with Axioma's track record and believe this combination provides a strong foundation for future growth. After our detailed analysis, we are confident that the combination will generate significant value creation and strong investor returns.”

Change Agent

In Ceria, Deutsche BÖrse is gaining an experienced hand at portfolio management and risk analytics and an outspoken advocate of technology.

A native of Argentina and a Carnegie Mellon University PhD in operations research, Ceria was an associate professor of decision, risk and operations at Columbia Business School for five years before founding Axioma in 1998, initially as a consultancy. Axioma entered the software business in 2001 with portfolio optimization and expanded into risk management in 2006.

Ceria critiqued industry practice in a February 2017 GARP Risk Intelligence article, Why Do So Many Asset Managers Continue to Rely on Old Risk Management Systems? In March this year, in The 'Global Technology Crisis': Modernize or Bust the CEO returned to the theme, contending that much of the buy side is still paying a price for allowing the 2008 financial crisis to sidetrack necessary technology upgrades.

On adopting cloud technology, Ceria asserted that it was sub-optimal to simply migrate systems to a cloud service. They should instead be developed as “cloud native,” or “purpose‐built for the cloud” - a point underscored by Axioma's then chief technology officer, now chief strategy officer, Fabien Couderc in a July 2018 article. The axiomaBlue infrastructure is described as a “cloud-native open environment.”