11 Sep 2008, Alastair Marsh, Risk magazine
Tuesday’s failed attempts to reach a deal is the second time in less than a year that negotiations between the two firms have ended in deadlock. On both occasions this has had adverse effects on stock prices, with GFI suffering the greatest price drops. When the first round of talks fell apart on November 19 last year, GFI’s stock price was at $23.53 - it has now reached $7.26. Tullett Prebon’s share price has fallen from 457p to 382.75p in the same period.
London-based Tullett Prebon’s stock price was largely unaffected by this week's news, falling to 369.75p after the talks broke down on Tuesday, from 398p at close the previous day. This morning it had recovered to 387p. But GFI Group, the smaller New York-based broker, experienced a sharper decline, falling from $10.75 to $9.61 at close of trade on the same day, and closing yesterday at $7.26.
The first merger fell through after GFI refused to pay a premium to Tullett's share price. It is understood yesterday’s negotiations collapsed for similar reasons, as GFI argued Tullett’s valuation of it was too low. The all-share offer was effectively reduced by volatile market conditions and the strengthening of the dollar against the pound.
A deal is seen by both parties as a strategic move that will combine Tullett Prebon’s experience in over-the-counter products, such as currencies, interest rates and fixed income, with GFI’s activity in the credit derivatives market. The combined resources of a GFI-Tullett Prebon group could potentially increase competition and challenge Icap’s dominance in the inter-dealer broker market. However, while the new group would overtake Icap as the world's largest interdealer broker by head count, it would still be smaller in terms of revenue. Icap’s preliminary results for the second quarter of 2008 record revenues of £1.3 billion, whereas revenue figures for GFI in the same period were $265.1 million. For Q1 and Q2 2008, Tullett Prebon’s revenue was £468.3 million.
It is unclear whether talks will be resumed.
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