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FTMO’s takeover of OANDA brought to mind some verses penned by the highly regarded South London artist Giggs in his famous work ‘Let em’ ave it’…
Don’t ask me how
Only thing that you should ask is who’s laughing now?
All them fools that thought that they was smart, who’s smartest now?
I won’t write the rest down but you get the point.
A lot of people made fun of props. Now a prop owns one of the biggest name brands in the broker industry. So who’s laughing now?
The mere fact that the company was able to buy OANDA out of its own pocket is a sign of just how big FTMO has become – there was no debt or equity issuance, that I’m aware of, to fund this purchase.
On the other hand, it raises an interesting question of…is this actually a good idea?
OANDA’s prior owner, assuming the transaction goes through, is private equity firm CVC Capital Partners.
They’ve owned the firm since 2018, which – if you look back on it – was probably the top of the market. The industry had grown massively, was highly saturated, and was about to get hit by ESMA’s regulations.
One sign that CVC has struggled to make a good return is the fact it has been holding OANDA for seven years. Rates going up has lengthened holding times for PE firms but the fact they couldn’t list the firm or sell it to another investment business is indicative of the potential problems investors in this industry face.
We’ve looked at these problems before. The basics are:
1. Revenues are highly dependent on unpredictable volatility spikes, which institutional investors dislike
2. Margins are very strong but businesses are not scalable
3. Questionable growth potential given regulatory frameworks in developed markets + high level of competition
Recently I spoke to one UK-based fund manager and asked why no one invests in the London-listed CFD players. His conclusions were basically those above, with the lack of scalability also meaning the impact on overall returns is small and it’s hard to find a buyer when you want to sell.
His basic conclusion – gambling companies and CFD shops are great firms to own as a private holder, not as an investor. The fact that Peter Cruddas and Denise Coates are usually among the biggest taxpayers in the UK is one sign that’s a valid argument.
But then FTMO is a private company and it’s not an investor in the same way that CVC is because it’s actually operating in the industry.
There are reasons to think this is a good deal but also potential it could be a bad one as a result.
Let’s look at them.
Positives of the FTMO – OANDA deal
Respectability and operations
I don’t have the time or cash to measure this precisely but I think most people would agree that OANDA has a good and respected brand in this industry.
It’s not smashed the lights out like others but it still makes – if prior reports are correct – upwards of $175m in revenue.
This is one part of what FTMO acquires – a good brand and respectability. Rightly or wrongly, props do not have the best reputation. Acquiring OANDA is proof that FTMO is a ‘serious’ firm, although personally I think they had nothing to prove.
Another facet of the acquisition is the set of licences and operations the firm has. OANDA has regulatory approvals in the US, Canada, Australia, Singapore, Japan, the UK, and the BVI. It has its own trading platform, as well as a MetaTrader license. It also has a crypto license in the UK.
Its prior ownership, as well as those approvals, means it is likely to have access to better banking and payments services.
New trader funnel
One other potential benefit of the deal is cross selling. FTMO can funnel people from its prop offering to its brokerage business. Presumably this can happen in the opposite direction as well, although OANDA also has its own prop product. Maybe that will get shut down? We’ll have to see.
Either way, one of the big trends in this industry over the last decade is to dump every product in the same place and have people jump between them. FTMO says it will keep OANDA as a standalone brand but it’s hard to see them not doing this in some way.
Extra cash at low valuation
A consequence of the fact that institutional investors don’t like this industry is that it limits your pool of buyers, which in turn puts downward pressure on the valuation.
FTMO made $100m in EBITDA in 2023, according to Finance Magnates. I don’t know what the figure was last year but the point is that, even if they do have a decent amount of cash, I would be very surprised if they paid much more than 0.5x – 0.75x revenues for OANDA.
As a result, it’s not implausible that they could keep OANDA as a standalone business, do nothing with it, and simply take out the company’s net income every year.
Depending on the P/E they paid, it would probably not take that long to recoup everything they paid for the firm. Obviously that money can be used elsewhere too, like reinvesting in the FTMO business.
Downsides of the OANDA – FTMO deal
Regulators
One potential downside of this deal is what we mentioned last week, namely that regulators hate this industry and so probably hate props as well.
It is thus beneficial in many ways to be a prop that stays completely outside of a regulatory framework. Mixing prop products with a broker offering could cause problems otherwise. This is likely why OANDA only accepts prop clients in places it is not licensed.
Thus buying so many tier-1 licenses could end up just causing headaches for FTMO. This is probably one of the reasons they have said they want to keep OANDA as a standalone business.
Another way of thinking about this is going multi-asset. Adding stocks, for example, can be a big plus, but it’s also a product that carries a lot of baggage with it and causes many additional regulatory headaches.
Difficult growth
The other potential downside is more dependent on what FTMO actually wants to do with the business.
OANDA is one of the few companies that did not go completely offshore post-2018. Instead it continues to operate in heavily regulated tier-1 markets, albeit with what we believe is a decent-sized offshore business in the BVI.
These markets are increasingly made up of a few massive players. This makes growth very difficult to achieve. I doubt you would find many executives today, for example, who think the UK offers great potential as a place to do business.
The result is that, even if OANDA can continue to generate good sums of cash, it will be hard to increase that amount in a meaningful way.
As noted, this may not be a massive problem, depending on what FTMO wants to do with the business. But if they are looking to do massive compound growth, the best option will probably be from cross-selling via their prop offering.
But in some ways that’s a big bet. No prop firm has made a big push into the broker space.
So will the cross selling actually work?
I guess we’ll have to wait and find out.
