Since breaking the news of FXall IPO hitting the road and the offering details, we have been inundated with questions and comments the past few days from folks looking at the upcoming IPO of the Forex ECN company. Management of FXall are currently on a week-and-a-half roadshow meeting institutional investors, prior to the planned pricing of the IPO mid next week (expected Wed Feb 8).
To address some of the issues raised in an organized fashion:
1) Can I see the FXall slideshow being shown to institutional investors? Yes. The slideshow, along with a 20-minute video presentation led by FXall CEO Phil Weisberg, can be seen by clicking here (and then choosing the “FX Alliance” link).
2) What are investors looking for while analyzing an investment in FXall? Good question. And there is no easy or uniform answer. Each investor looks for different things, in different ways, beyond the obvious and basic metrics such as growth in volumes, revenues, margins, profits, competition, industry dynamics….. We believe, however, that potential FXall investors should be able to address the following key questions:
- Growth. Was the fall in volumes in Q4 at both FXall and throughout the Forex ECN industry a one-time blip, or the beginning of some drawn out slowdown? In its prospectus, FXall blamed the drop in volumes on the “Eurozone crisis, which has created uncertainty…”. We don’t buy that. In the past, the BEST times for Forex trading volumes have come specifically during turbulent financial times, when high levels of volatility entice traders.
- Industry becoming crowded? As this is about as commoditized an industry as one can imagine, with clients (i.e. institutional and corporate traders) looking mainly for the best prices out there, where are margins going as more and more players join an already crowded market? As we reported earlier, aside from reporting falling revenues and EBITDA levels FXall has shown a rapid deterioration in its key operating margins (see charts below) the past two years.
- Why the change to a selling-shareholders-only offering? FXall’s original IPO filing back in September showed plans for the company to raise money as part of the IPO, in addition to some selling by existing shareholders. Now, FXall has apparently changed its plans and will receive no money itself from its own IPO, with the entire offering being selling shareholders. Typically, growth companies like to come with a good “growth story” to the IPO market, which usually includes a need for capital in order to continue to expand the business. While FXall will have a healthy $54 million in cash on its balance sheet (after paying a planned pre-IPO $63 million dividend to current shareholders), with little debt, is it signalling to the market that its growth opportunities may be limited?
- …and finally, Valuation. While it is in a different niche than retail Forex firms FXCM and Gain Capital, clearly these companies are all somewhat together in the same boat and dependent on the overall global growth of electronic Forex trading. Is the growth story at FXall that much greater than that at FXCM and Gain, that FXall deserves a higher trading multiple than those companies (see table below)? With the shares of both FXCM and Gain down significantly from their late-2010 IPO pricing levels, how does FXall convince investors the story will be different this time?
FXall Valuation versus FXCM and Gain Capital: