Orc/Neonet merger enables joint equity and derivatives offering

Trading software firm Orc and Neonet, an agency broker and trading technology provider, have announced plans to merge, subject to shareholder approval.
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Trading software firm Orc and Neonet, an agency broker and trading technology provider, have announced plans to merge, subject to shareholder approval. The firms currently expect the deal to close on 7 April.

Orc is offering 0.125 new Orc shares for each share in Neonet in a deal valued at SEK 1.277 billion (€124.8 million) based on closing prices on 22 January.

The combined listed entity will retain the Orc name, although the Neonet brand may continue to be used on certain of the firm’s services. Thomas Bill will continue as CEO of Orc. The rest of the management structure has not yet been finalised.

Simon Nathanson, CEO of Neonet, told theTRADEnews.com, “I will continue to contribute to the new company as much as I can.”

The two companies contend that they complement each other well given Orc’s focus on derivatives trading solutions and Neonet’s concentration on equity trading and hosted technology.

Orc’s current product suite includes the Orc Trading range of trading interfaces for algorithmic trading, arbitrage and market making, plus the Orc Connect market and broker gateways and FIX connectivity solutions. Neonet’s offering includes the XG suite, comprising a market gateway, smart order router, broker connectivity, execution management system and market data feeds.

The new company would, for example, be able to offer Orc’s trading solutions via Neonet’s managed service offering.

The merged entity will consist of two divisions: technology and transaction services. The technology unit will offer Orc’s and Neonet’s technology solutions in the form of licences, in accordance with Orc’s current business model. Because technology generates recurring, predictable revenue streams, this division will constitute the foundation of the new entity, and the companies expect it to account for 60% of the group’s turnover in 2010.

The transaction services unit will house Neonet’s agency brokerage capabilities and will offer an independent global execution network for equities and derivatives. The division will account for approximately 40% of the turnover in 2010.

The firms expect that the two units combined could generate an operating margin of more than 35%.

The companies said the merger was prompted by strong growth and rapid change in the market for advanced trading technology, which is creating opportunities for established suppliers but also putting increasing pressure on them to continually develop their offering to stay competitive. Customers are demanding continuous performance enhancements, more market connections, more integrated trading tools – such as smart order routing and basket trading – and opportunities to trade across multiple asset classes.

In addition, the firms noted a rising demand for integrated equity and derivatives trading solutions and alternative delivery models, partly in the form of hosted technology solutions and partly as technology integrated in an execution service.

“Through the merger between two leading providers of technology and services for financial trading, we will create an even stronger global player in this area,” said Bill in a statement. “By joining forces, the merger will enable us to develop better technology faster and at a lower cost.”

Orc and Neonet expect “significant synergies” from the merger, partly through efficiency gains and by combining the companies’ product offerings and expertise. The synergies are expected to take full effect in 2012 at the latest, at which time they are expected to increase operating income by SEK 30 million annually. A third of this is attributable to cost synergies, which are expected to reach full effect by 2011 at the latest.

Because of the lack of product overlap between the two firms, cost savings are expected to come mostly from the benefits of running the companies as a single listed entity, such as a reduced administrative burden.