Exclusive: NASDAQ, S&P eye acquisitions to build index businesses
NEW YORK (Reuters) - Exchange operator Nasdaq OMX Group (NDAQ.O) and index provider S&P Dow Jones Indices (MHFI.N) said they are interested in acquisitions to grow their index businesses, in a sign the sector could see a wave of deals as investors pour tens of billions of dollars into portfolios that track benchmarks.
Both Nasdaq Chief Executive Robert Greifeld and S&P Dow Jones Indices Chief Executive Alex Matturri told Reuters in recent interviews that they would be interested in looking at bidding on index businesses that come to market, including the index businesses run by Russell Investments and Barclays Plc (BARC.L).
"Growing the index business is at the top of our list for 2014, both organically or through acquisitions," Greifeld said last week. "We have this index engine and people don't realize that anything MSCI (MSCI.N) can do or S&P can do, we can do right now."
Nasdaq launched its first index, the Nasdaq Composite, in 1971 and today over $1 trillion in assets track Nasdaq indices. Greifeld said the company has spent the last 12 months integrating its indices with its data offerings. It launched 13,000 new indices on Monday.
Matturri said that S&P Dow Jones Indices would also look at any other assets in the index space that might come up for sale as well.
"Indexing as a whole has been on a good streak for a while as people are looking toward passive products for lower costs and good returns," Matturri said.
Nasdaq and S&P Dow Jones Indices' interest in acquisitions comes at a time when the business is seeing explosive growth but also increasing cost and regulatory pressures, attracting potential buyers and prompting would-be sellers to take the plunge.
Sources have said previously that the Barclays business is expected to be put up for sale this year and that Northwestern Mutual Life is exploring a sale of its entire Russell Investments asset management business. The insurer is considering spinning off the indexes in a separate sale, according to sources. All the sources wished to remain anonymous because they are not permitted to speak to the media.
"If you were ever going to sell your index business in the next 20 years, now is not a bad time to do it before margins get really terrible," said Dave Nadig, chief investment officer of IndexUniverse, a San Francisco-based company that tracks ETFs.
But the frenzy around indexing may lead to bidding wars. "There is a good chance that someone overpays," Nadig said.
Investors have poured more than $1.1 trillion into index-based mutual funds and exchange-traded funds over the five years ending November 30, compared to $785 billion into actively managed funds and ETFs over the same period, according to Morningstar Inc (MORN.O).
At the same time, some traditional owners like banks are seeking to exit the business as regulators scrutinize benchmarks closely following the rigging of the London interbank offered rate (Libor), an interest rate benchmark.
Experts said other banks that offer benchmarks, like Bank of America (BAC.N), may also decide it is not worth owning the business. A Bank of America spokeswoman declined to comment.
"Because of Libor, regulators are paying more attention to where potential conflicts exist when a provider is the price provider and the product provider," Matturri said.
Major fund companies are also looking to cut costs on their ETFs and funds, and many index providers are realizing that it is difficult to be profitable in this business. For example, firms need the technology to do the data cleansing, make sure the pricing is real time and that they have the infrastructure to support the service, Matturri said.
Nasdaq's and S&P Dow Jones join what could become a crowded field of buyers for index businesses.
Barclays is discussing putting its index business up for sale after receiving interest from MSCI and others, sources have said. Other players such as Bloomberg, Thomson Reuters Corp (TRI.TO), FTSE and Markit are expected to also take a look at that book of business, sources have said.
FTSE, Markit and Thomson Reuters declined to comment. Calls to MSCI and Bloomberg were not immediately returned.