Nasdaq to Acquire Canadian Firm Verafin in its Lengthy Battle Against Financial Crime
Stock exchange operator Nasdaq’s $2.75 billion cash deal to acquire the provider of technology that fights financial fraud and money laundering will bring the Canadian firm Verafin to global markets. The Canadian tech firm’s innovative platform, which helps banks and brokers detect criminal activity, will aid Nasdaq’s performance and position in the anti-financial crime technology market – a $13 billion market according to Oliver Wyman. The sector is large and growing: a result of structural and regulatory tailwinds. With products powered by intelligent analytics, machine learning, robust shared data insights, and powerful investigation tools intended to increase fraud detection with more accuracy, many financial institutions are likely to turn away from old technologies and invest in Nasdaq’s growing software as a service (SaaS).
Verafin, a Canadian software company founded in 2003, works alongside nearly three thousand banks and Credit Unions across Canada and the US. The deal will combine Verafin’s technology with the stock exchange’s international reach to lead the fight against financial crime. With the acquisition, Nasdaq aims to expand Verafin’s services to its global network comprised of nearly 250 banks, exchanges, broker-dealers, investing firms, and regulatory authorities, all of which rely on the stock exchange’s technology to detect market manipulation and abuse. The technology is expected to make its way to Europe’s largest banks and second-tier institutions as well.
Financial regulators are increasingly more demanding on banks, brokerages, fintech and other financial intermediaries, particularly because these institutions stand as the frontline defence against the criminal use of the financial system to fund illicit activities. In 2019, regulators imposed $8 billion in anti-money laundering (AML) fines against banks globally. Regulars are increasingly more vigilant of global institutions for their oversight of financial crime detection. To contextualize, approximately $2 trillion is laundered annually, and the $12.5 billion market devoted to cracking down on financial crimes is predicted to grow 17% over the next four years. Annually, an estimated $42 billion is invested in the anti-financial crime space with almost a third of it going directly to technological innovations.
The strong regulatory tailwinds that are firmly compelling financial institutions to invest significant capital and resources into fighting financial crime have benefitted Verafin greatly. Over the last three years, the company’s top-line has grown at a compound annual growth rate of roughly 30%. The firm expects to deliver revenues in excess of $140 million in 2021. Consistent with high-growth SaaS peers, Verafin’s expected revenue represents an implied transaction multiple of approximately 19.5x.
Other than strong strategic and cultural fits between both companies, the synergies of the deal will accelerate Nasdaq’s position as a leading SaaS technology provider. The exchange operator’s latest acquisition will provide even more software and analytics to the financial industry. Verafin’s particularly important technology will enhance the value of the exchange operator’s already established trade and market surveillance services. Revenue synergies are also at play given that the transaction is presumed to increase revenue contribution from the highest-growth Market and Investment Intelligence segment by 3%, from 44% to 47% of Nasdaq’s total net revenue pro forma 2020’s third quarter financials. The acquisition’s value creation is likely to enhance Nasdaq’s performance. The deal’s valuation potential puts forward an optimistic outlook driven by the anticipated increase in organic revenue growth within its solution segments. Earnings per share (EPS) are expected to grow following the deal, with EPS accretion anticipated as early as 2022.
Over the years, the Canadian company has had interest from various sources and ultimately rebuffed a number of previous suitors ranging from private equity firms to strategic market players. The deal goes forward on the premise that Nasdaq will commit itself to invest in Verafin’s expansion goals within the Newfoundland and Labrador province. The deal will see Nasdaq help support the tech start-up’s business and create opportunities for its employees. The Canadian company will proudly remain in St. John’s, Newfoundland and Labrador where the executive team will continue to lead the business’ growth. The exchange provider has also pledged to work closely alongside Memorial University and provide scholarship opportunities. Nasdaq will also enhance charitable and community services provided by Verafin in St. John’s.
As financial firms actively seek help to improve their vigilance and step up their archaic and simplistic monitoring and detection systems, the growth of costly transitions to better anti-financial fraud and crime risk services is likely to favour Nasdaq, reinforcing its leading position in the sector. Verafin’s reach and growth is quite promising as security and fraud detection systems are being updated across-the-board by financial institutions in favour of more innovative analytic technologies, machine learning, and artificial intelligence.