The owner of Hong Kong’s stock exchange, after years of pinning its growth plans to the city’s tighter integration with China, is changing tack and eyeing technology acquisitions, people with knowledge of the matter said.
Hong Kong Exchanges & Clearing Ltd. Chief Executive Officer Charles Li is considering takeovers in the data, analytics and blockchain sectors, said the people. HKEX has met with at least three investment banks to discuss potential targets, they said, asking not to be named discussing sensitive information.
With the expansion of trading links with Chinese exchanges stalling, Li is looking at the venture capital arms of rivals CME Group Inc. and Nasdaq Inc. as possible models, according to the people. HKEX officials are also concerned that worsening relations between China and the U.S. could hurt trading volume, one of the people said, jeopardizing a main driver of revenue growth.
Technology acquisitions were the focus of an internal HKEX strategy discussion with senior managers on Sept. 10 and a meeting with board members on Sept. 12, two of the people said. The company’s management is meeting to discuss the outlines of a new three-year strategy plan due to start in 2019. The final plan will likely be announced early next year and may change before then, the people said.
HKEX’s high valuation compared to its rivals means the firm needs to look to innovation and technology to help generate growth, Li said at the Sept. 10 meeting, and he made the comparison with Nasdaq, the people said. The New York-based exchange operator saw about 19 percent of its 2017 revenue from data products and 13 percent from market technology, according to data compiled by Bloomberg. HKEX generated almost all its 2017 revenue from clearing and trading fees, the data show.
“The strategy is in the right direction but it is not easy to achieve the targets,” Banny Lam, head of research at CEB International Investment Corp., said by email. “HKEX needs to maintain a momentum of growth by exploring new businesses.”
The company may find it hard to convince investors that it can turn itself into an international technology platform, according to one person who spoke to HKEX about the new strategy. HKEX struggled to integrate London Metal Exchange, for which it paid $2.2 billion in 2012, and there are industry concerns the company cannot pull off another major deal, a second person advising the firm said.
The stalled nature of relations with China were highlighted this week when Ashley Alder, CEO at the Securities and Futures Commission, said negotiations over a trading link for exchange-traded funds was proving “very challenging.”
— With assistance by Mark Burton, and Philip Lagerkranser