Follows a very brief attempted “friendly” offer by FXCM, which was rebuffed by Gain Capital management.
In a move which has shocked the FX world, FXCM has made an offer to acquire Gain Capital (Forex.com) for $5.35 per share, or a total of $210 million — all payable in FXCM stock.
That’s the headline. But the interesting part is what happened behind-the-scenes. As would be expected in a situation like this, FXCM CEO Drew Niv and his team held a series of discussions with his Gain Capital counterpart Glenn Stevens over the past few weeks, suggesting the merger between the two firms. But Stevens and his team didn’t want to do the deal, and sell out at such a low price — Gain’s shares (as at Monday’s close of $4.27) sit at less than half their December 2010 IPO price of $9. FXCM has fared much better, with its share price hovering right around their $14 IPO price (see chart below).
So, Niv and his team have decided to take their offer public, and have sent what is known in the M&A world as a “bear hug letter” directly to Gain Capital’s board. In its letter, FXCM outlines to the Gain board why they should accept the offer — benefits of merging the companies, cost savings (which would likely consist of the firing of many/most people now at Gain), etc. But in the in-between-the-lines message, FXCM is telling the Gain board that they’re sitting on a dead duck of a stock at Gain, and that this is the best way out.
And why shouldn’t FXCM do this??!! At its current share price, Gain Capital has a market value of about $152 million, and holds cash of $127 million — meaning that even before factoring in cost savings, FXCM would be getting Gain Capital’s business, including the Forex.com and Gain GTX brands, nearly for free. And without giving up any of its own valuable cash resources, making the offer entirely in shares.
So where does it go from here? We of course can’t know for sure. But what is typical is that the Gain board will dutifully consider the offer, reject it as valuing the company too low, but use that as a lever to elicit a better offer from FXCM, or another suitor. With Gain Capital not showing any great operational promise, and its share price languishing in “dead IPO” range, it is highly likely that Gain’s major shareholders would like the opportunity to cash out, and as such the board might try to get FXCM to add a cash component to their offer.
$FXCM (blue) versus $GCAP (red) share prices, Dec 2010 to present:
Source: Google Finance.
Stay tuned to LeapRate, this should be a very interesting story to follow in the coming weeks….
For more on M&A in the Forex sector, including a list of transactions dating back to 2006, and M&A valuation multiples over time, see the LeapRate-Dow Jones Forex Industry Report.