Shareholders eye Simcorp’s record acquisition critically

Deutsche Börse headquarters in Eschborn near Frankfurt

The stock exchange operator’s share has lost around twelve percent since its high for the year on April 25.

(Photo: dpa)

Frankfurt Deutsche Börse is driving the largest acquisition in its history. After approval by the Danish financial regulator, the Dax group published a voluntary takeover bid for the software company Simcorp on Thursday. The offer period runs until July 13 at 11:59 p.m., but can be extended again if necessary, the company said.

Deutsche Börse is offering 735 Danish kroner per share. This corresponds to a premium of 39 percent on Simcorp’s closing price before the takeover bid became known. Overall, the Copenhagen-based company is valued at 3.9 billion euros in the deal.

The takeover will only happen if more than 50 percent of Simcorp shareholders accept the offer and all authorities approve the purchase. With the takeover, Deutsche Börse would become less dependent on the ups and downs on the markets. The share of the data, analytics and software business in total revenues would increase from 15 to 24 percent.

Simcorp provides investment management software for large investors such as asset managers, pension funds, and central banks. With the takeover, Deutsche Börse would strengthen its business with the so-called “buy side”.

“We are then also active in the machine room of the investors, covering the entire investment management,” said CEO Theodor Weimer at the annual general meeting in mid-May.

Investor Deka: “It remains to be seen whether this will pay off.”

However, many investors and analysts are not yet convinced of the deal – mainly due to the high purchase price. Germany’s largest stock exchange operator “had to dig deep into their pockets and accepted a high valuation” for the takeover, said Andreas Thomae from Deka Investment at the general meeting. “Whether that pays off remains to be seen.”

On the day the Simcorp acquisition was announced on April 27, Deutsche Boerse shares fell 7.7 percent. Four weeks later, they are trading at EUR 163.70, which is still around twelve percent below the high for the year of EUR 186.30 on April 25.

The analysts at Morgan Stanley attribute the negative price development to three main reasons: Deutsche Börse pays a whopping 30 percent premium on the average valuation of European software companies.

In the past, Simcorp’s sales have grown less than those of Deutsche Börse. And Simcorp’s operating profit margin (Ebitda margin) of around 25 percent is well below Deutsche Boerse’s 60 percent and also below the average margin in the data and analytics segment of 40 percent.

Barclays analysts therefore expect Deutsche Börse’s Ebitda margin to fall as a result of the acquisition. In addition, Simcorp’s profit contribution will remain manageable in the coming years. In view of the high takeover price, the deal is therefore “uninspiring” overall.

Can the stock market keep up with Bloomberg and MSCI?

Ian White from Autonomous Research complains that the exchange will use up its resources for larger takeovers for the foreseeable future with the Simcorp purchase. For example, some analysts would have found a multi-billion dollar takeover of the fund platform Allfunds more sensible. And some investors would probably have preferred a share buyback.

In addition, some experts have fundamental doubts as to whether Deutsche Börse can keep up with industry giants such as MSCI or Bloomberg in the data and analytics business. Autonomous analyst White finds it unclear how the Hessian company intends to set itself apart from other large financial data groups with its offerings.

Stock exchange boss Weimer does not want to be dissuaded from his path despite such reactions. It’s not unusual for the company’s own share price to drop a little after such a large transaction, he says. “We are absolutely convinced that we are doing the right thing.”

More: Market turbulence brings record profit for Deutsche Börse

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