"Traditional" brokers resort to M&A to survive in the COVID-19 climate, which has boosted customer demand for DIY online trading platforms

Overview

Current market

• Moderate M&A activity levels

We are seeing

• The COVID-19 pandemic driving customer demand for DIY/ online trading platforms (i.e., DriveWealth, M1 Finance, Groww, Morpher and Robinhood have all successfully raised growth capital in H2 2020)
• Financial sponsors supporting digital disruptors
• Brokers look to M&A to compete in the COVID-19 climate:
  • Gaining scale (e.g., Consultinvest/Sol&Fin merger, Citadel Securities' acquisition of IMC's designated market-making business, Interactive Investor's acquisition of Share, etc.)
  • Expanding geographical reach (e.g., OANDA's acquisition of TMS Brokers and EMZ Partners' acquisition of majority stake in ASSEPRO)
  • Amalgamating senior talent (e.g., Eaton Square acquisition of M&A Advisory)
  • Delivering electronification and efficiency (e.g., TP ICAP's acquisition of Liquidnet)
  • Encancing digital asset capability (e.g., INX's acquisition of Openfinance

Key drivers/challenges

• Brokers under significant pressure to future-proof business models:
  • Scale to accommodate margin compression, whilst ensuring strategic fit and senior management shared values
  • Capital required for investment in automation as well as monitoring and reporting technology
  • Orientation of service delivery to enhance customer experience and achieve differentiation from competitors
• Banks and other FIs seek:
  • Vertical integration (e.g., Deutsche Börse's acquisition of majority stake in Quantitative Brokers and MarketAxes's acquisition of Regulatory Reporting Hub)
  • Diversification into non-bank financial services (e.g., NI Capital's acquisition of Arabeya Online Brokerage and Banco BTG Pactual's acquisition of Necton Investimentos)
  • Opportunities to expand into China (e.g., Goldman Sach's acquisition of remaining stake in Goldman Sachs Gao Hua and J.P. Morgan's acquisition of remaining stake in J.P. Morgan Securities (China))

Trends to watch

• Uptick in "acqui-hires"—transactions aimed at inorganic growth of sector expertise
• China—the new frontier
• Rise of the JV model (e.g., ABN AMRO's Benelux equity brokerage JV with ODDO BHF)
• Digital asset specialists seeking 'traditional' broking capability (e.g., eToro's rumoured interest in acquiring an operating broker/dealer)

Our M&A forecast

Larger, more diverse and digitally enabled brokers to emerge in the next 18 to 24 months, offering brokerage services across a range of traditional and digital asset classes.

Other financial services—Publicly reported deals & situations

High investor appetite

Trade bulk-up:

• Goldman Sachs (China): Acquisition of remaining stake in Goldman Sachs Gao Hua (December 2020)
• J.P. Morgan (China): Acquisition of remaining stake in J.P. Morgan Securities (China) (November 2020)
• NI Capital Holding (Egypt): Acquisition of Arabeya Online Brokerage (November 2020)
• Eaton Square (UK): Acquisition of M&A Advisory (November 2020)
• BTG Pactual (Brazil): Acquisition of Necton (October 2020)
• Consultinvest & Sol&Fin (Italy): Merger (October 2020)
• Citadel Securities (US): Acquisition of IMC's designated market-making business (October 2020)
• TP ICAP (US): Acquisition of Liquidnet (October 2020)
• Compagnie Financiere Tradition (New Zealand): Acquisition of OM Wholesale (September 2020)
• OANDA (Poland): Acquisition of TMS Brokers (September 2020)

Trade diversification:

• INX Limited (US): Acquisition of Openfinance Securities (October 2020)
• MarketAxess (Germany): Acquisition of Regulatory Reporting Hub (September 2020)
• Deutsche Börse (US): Acquisition of majority stake of Quantitative Brokers (September 2020)
• Banque Misr (Egypt): Acquisition of further 9% of CI Capital (August 2020)

Private equity/Venture capital:

• EMZ Partners (Switzerland): Acquisition of majority stake in ASSEPRO (November 2020)
• Ribbit Capital (Online investing): Participation in US$21.4 million Series B funding round for Groww (September 2020)
• Apex Ventures (Online trading): Participation in US$1.25 million Seed funding round for Morpher (August 2020)
• D1 Capital Partners (Online trading): Participation in US$200 million Equity funding round for Robinhood (August 2020)

Market appetite:

• Flexdeal: Successful €10 million capital increase via public subscription (August 2020)

Market consolidation to achieve economies of scale & scope

• R.J. O'Brien & Associate (UAE): Acquisition of Lombard Forte Securities (August 2020)
• K3 Capital Group (UK): Acquisition of Quantuma Advisory Limited (August 2020)
• Freedom Holding Corp (Russia): Acquisition of Zerich Capital Management (July 2020)
• Interactive Investor (UK): Acquisition of Share (July 2020)
• Legae Peresec (South Africa): Acquisition of 49.9% of African Phoenix Investment (June 2020)

Mounting competition from digital providers

• DriveWealth (Online trading): Successful US$56.7 million Series C funding round, led by Point72 Ventures (October 2020)
• M1 Finance (Online trading): Successful US$45 million Series C funding round, led by Left Lane Capital (October 2020)
• Groww (Online investing): Successful US$21.4 million Series B funding round, led by Ribbit Capital (September 2020)
• Morpher (Online trading): Successful US$1.25 million Seed funding round, led by Apex Ventures (August 2020)
• Robinhood (Online trading): Successful US$200 million Equity funding round, led by D1 Capital Partners (August 2020)

Click here to download 'Financial services M&A stages a herculean comeback in H2 2020, finishing the year on a high' PDF.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2021 White & Case LLP}