LeapRate presents a comparison of the IPOs of FXCM and Gain Capital (Forex.com)

Dec. 20, 2010 - PRLog -- With relatively little fanfare beyond mention in several Forex blogs, one of the most monumental (non-regulatory) changes in recent memory has occurred in the online Forex trading sector this past month – two of the leading US-based firms, FXCM and Gain Capital (Forex.com), have gone public.

The IPOs of FXCM and Gain were just one-time events, which did little but stream cash directly to the pockets of the shareholders of both firms. (The offerings were primarily “secondary” offerings, meaning that most of the cash raised did not go to the companies, but rather to the shareholders whose holdings were thereby diluted). However, the lasting effects of both offerings include:
-   Information Flow – For the first time, we will have timely and detailed information every quarter from two leading firms in the sector, detailing both their operations as well as the overall health of the global online trading industry. This is of particular importance for FXCM (in terms of a window on the industry globally), as FXCM receives more than three-quarters of its business from outside the US. Beyond the raw quarterly numbers, we will also be apprised of important regulatory issues and market trends, which otherwise might not come to light in a timely fashion.
-   Likely Consolidation – Publicly traded stock makes for valuable and potent acquisition currency. While both FXCM and Gain have already been somewhat acquisitive of late, they both now have a new way to compete for more and even larger acquisitions. (For a list of financing and M&A transactions in the online trading sector from 2005 to present see LeapRate’s Industry Report on the online trading sector, downloadable at http://www.leaprate.com/IndustryResearch.html). Looking at other industries, M&A activity typically increased greatly after the first few companies in the sector went public and led to consolidation toward a few large firms – a recent and relevant example is e-commerce, where firms such as eBay (PayPal, Bill Me Later, Skype, Shopping.com), Amazon (Zappos, Drugstore.com) and Google (YouTube, DoubleClick, AdMob) have been actively gobbling up competition and expanding their horizons since going public.
-   Pressure on other Firms – All other things being equal, both FXCM and Gain are likely to become preferred firms for clients due to their increased transparency – particularly for coveted high-net-worth retail and institutional clients to whom transparency and knowing-your-trading-partner are important. We expect other leading firms, such as Saxo Bank in Europe and Oanda in North America, to look more seriously at an IPO in an effort to “keep up with the Joneses”. It will also be harder for these non-public firms to compete for acquisitions, lacking the acquisition currency of publicly traded stock.

The IPOs – Success of Failure?

On the face of it, neither the IPO of FXCM nor the IPO of Gain were very successful. While FXCM did enjoy a brief “IPO pop”, closing its first day of trading 6% above its IPO price, the stock of both companies is now trading below their respective IPO prices – and for Gain that comes after pricing its IPO at just $9 per share, well below the $13-$15 range which it marketed on its “red herring” IPO prospectus. Both companies are being valued by the market at single-digit P/E ratios, well below stock market averages in the mid-teens.

However, we consider both companies’ IPOs a great success. It is not easy to be the first firms to go public in an industry. Beyond selling your own growth story you need to educate the market on issues such as competition, regulation and what the industry is all about. Investors are lacking their beloved “comps” in trying to peg value. Equity research analysts need to learn a new sector. Especially in today’s somewhat conservative, anti-risk market environment, anything new is hard to bring to market. In our view, just getting these deals done was a major success, and will serve the overall industry well over the long run. And in the long term, both companies will be judged on their results (as they should be), and their ability to deliver quarter-over-quarter consistent growth and profitability.

Comparing the IPOs

To download the original release including the following table containing a comparison of key number from the FXCM and Gain Capital IPOs (such as offering size, market value, key valuation ratios) please see
http://www.leaprate.com/uploads/Comparison_of_FXCM_and_Ga...

[data table]

From the numbers in the table above, it is quite clear that the market prefers FXCM over Gain Capital. FXCM is trading at a 31% higher P/E ratio; an 80%+ premium to Gain in terms of value to revenue and EBITDA; and the market is giving FXCM a $6,233 value per active client, 31% above FXCM’s $4,744 per active client. By any measure, FXCM is trading at a significant premium to Gain.

There are several ways to look at this. On the one hand, Gain can be looked at as a relative bargain compared to FXCM. But on the other hand, as in many industries, the leading companies are afforded and maintain a valuation premium by the market (and FXCM is roughly twice the size of Gain Capital, and much more diversified geographically).

While we are not market prognosticators nor providing a view as to where are how these stocks should trade, we believe that Gain is being unfairly punished as compared to FXCM, and that the key valuation ratios of the two companies are likely to converge at some point. Indeed, Gain has been showing better growth of late than FXCM, with its 2010 first-nine-months revenues up 30% from 2009, versus just 6.5% growth for FXCM. If valuation ratios are meant to (at least in part) reflect growth, it is Gain which should get the higher ratio. Time will tell….

LeapRate wishes you successful trading in 2011, and a happy and healthy New Year.

Note that we express no opinion or recommendation regarding any of the securities of the companies mentioned in this report.

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LeapRate is an independent research and advisory firm, covering the world of online trading. Our main two areas of activity are detailed research reports on the sector, and ratings for online trading and brokerage firms worldwide. LeapRate’s research and ratings provide increased transparency to the world of online trading, allowing investors to make more informed decisions in their choice of a trading firm. For more information and disclosures see our website at http://www.leaprate.com.