Two years after then TSX Group Inc. bought the Montreal Exchange in a top-of-market deal, the numbers show that the promises of growth from the deal were vastly overblown.
Combining derivatives and cash equities has done next to nothing for revenue and profit growth at the merged TMX Group Inc.
The stated goals of the creation of TMX with the acquisition were to create a bigger company that would be better positioned to compete and grow as exchanges consolidate, to give a broader product offering, a more diversified revenue base, to benefit from synergies and cost cuts and to accelerate growth strategies with initiatives such as new products and better data products.
So, how has the company done with its foray into becoming a cash and derivatives exchange?
It's a good time to look back, as it's now more than two full years since the company completed the acquisition of the MX, and 2009 was a tough year to judge given the paroxysms in markets.
Now, with third-quarter 2010 numbers in hand, it's time to compare.
The third quarter of 2008 was the first full quarter as a merged entity. The third quarter of 2008 was also the period when the TMX acquired a controlling interest in the U.S. BOX derivatives platform, further bulking up the derivatives side of the company.
In that quarter, the company's derivative business generated $13.7-million in revenue, plus $3.3-million in clearing revenue from MX. Volumes on the MX stood at 9.9 million contracts traded. The MX acquisition also added to TMX's market data sales.
The result in that first full quarter was overall revenue of $139.4-million and profit of $50.1 million. Fast-forward two years and third quarter revenue is $141.6-million and net income is $50.8-million.
That's 1.6 per cent growth in revenue and a 1.4 per cent increase in profit. On a per share basis, earnings have risen to 68 cents from 66 cents two years ago.
Derivatives trading accounted for 12 per cent of sales two years ago. Today it brings in 15 per cent of revenue.
MX volumes are up, but not much at 10.64-million contracts. That's 7.5 per cent growth over two years. BOX is suffering from declines in overall U.S. trading.
On most of those numeric measures, the merger has not been a success. The promised growth in derivatives, for which TSX Group Inc. paid up to become TMX Group, has never materialized.
Should TSX have taken a pass on MX? The answer, despite the steep price, is likely no. The two companies were about to go head to head after a non-compete agreement expired, which would have been murder on profits. MX was eyeing moving into stock trading, and TSX was ready to fight back by building its derivative business.
In a market as small as Canada, the scrap would have bloodied both and left them seriously weakened.
Merging was a sensible option. But paying a growth multiple still haunts TMX shareholders.