BMO Financial Group To Acquire Clearpool For Algorithmic Trading Tech – Bank of Montreal (NYSE:BMO)

Quick Take

BMO Financial Group (NYSE:BMO) has announced the proposed acquisition of Clearpool Group for an undisclosed amount.

Clearpool has developed a suite of algorithmic and electronic trading systems.

With the deal, BMO is adding improved capabilities to its capital markets group as the firm seeks to take advantage of increased electronic trading and related commissions and fees in that growing sector.

However, given the low interest rate environment and its negative effects on bank results, and despite its favorable DCF valuation, my current bias on BMO stock is NEUTRAL.

Target Company

New York, NY-based Clearpool was founded to create equity market electronic trading capabilities for broker-dealer clients seeking higher quality trading execution options.

Management is headed by co-founder and Chief Executive Officer Joseph Wald, who was previously EVP at Gain Capital Group and CEO at EdgeTrade.

Below is an overview video of Clearpool Group:

Source: Clearpool Group

Clearpool’s primary offerings include:

Investors have invested at least $8 million and include Edison Partners.

Market & Competition

According to a 2019 market research report by MarketsandMarkets, the market for algorithmic trading is expected to reach an estimated $18.8 billion by 2024. This represents a forecast CAGR (Compound Annual Growth Rate) of 11.1% from 2019 to 2024. The main drivers for this expected growth are growing demand for more effective order execution, lowered transaction costs, increased compliance requirements, and higher desire for market surveillance.

Major vendors that provide competitive services include:

Source: Sentieo

Acquisition Terms & Financials

BMO Financial Group didn’t disclose the acquisition price and terms and didn’t file a Form 8-K. Management also didn’t provide a change in financial guidance as a result of the transaction, so it is likely a financially non-material deal size.

A review of the firm’s most recent published financial results indicates that, as of October 31, 2019, BMO Financial Group had $35.6 million in cash and equivalents and $41.4 billion in long-term debt.

In the past 12 months, BMO Financial Group’s stock price has risen 7.8% vs. the U.S. Banks industry’s rise of 11.4% and the U.S. S&P 500 Index’s growth of 21.7%, as the BMO chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive in ten of the last twelve quarters, as the chart shows below:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has been stable since high volatility in Q1 2019, as the linguistic analysis shows here:

Source: Sentieo

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$50,370,000,000

Enterprise Value

$50,080,000,000

Price / Sales

2.69

Revenue Growth Rate

10.65%

Earnings Per Share

$6.14

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $96.53 versus the current price of $78.40, indicating they are potentially currently undervalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

BMO is acquiring Clearpool to bolster its electronic trading offerings to clients as they clamor for more options in an increasingly electronically-driven environment.

As Capital Markets CEO Dan Barclay stated in the deal announcement,

BMO Capital Markets is accelerating on our strategic priorities of delivering exceptional client experiences, driving an innovation mindset, activating a high performance culture and simplifying how we do business. The acquisition of Clearpool is consistent with these priorities as it gives us access to leading next-gen trading technology and a broker-dealer client base.

More to the point, electronic trading is a ‘rapidly growing portion of the global equity secondary commission/fee pool,’ estimated to now range between 73% to 90% of global equity flows.

So, with the deal for Clearpool, BMO is better positioned to retain share of wallet in this important area for commissions and fees.

What’s unclear is how much this deal will add to BMO’s Capital Markets group P&L. Since BMO didn’t provide a change in financial guidance, my estimate is that, at least in the short term, the additional revenue may not move the needle.

But I like the long-term thinking associated with the acquisition, and I believe BMO management is right to focus resources on improving its electronic trading capabilities.

BMO’s overall results and stock have no doubt been hampered by the ultra-low interest rate environment hurting the banking sector.

Deals like the one for Clearpool provide some insight into management’s thinking on how to maximize capital markets revenue, so the stock may be one to watch more closely in the future.

I research IPOs and technology M&A deals.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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