Barron's Streetwise - Nasdaq CEO Adena Friedman’s Big Deal

Episode Date: June 16, 2023

Plus, best-selling author Scott Patterson’s new book Chaos Kings. And the triumph of Mexican beer. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Adina Friedman. She's the CEO and chair of Nasdaq, which just announced its biggest acquisition to date. And Nasdaq stock dropped on the news, suggesting that investors have concerns about the deal price. Adina will explain why she thinks the acquisition is a good opportunity. price. Adina will explain why she thinks the acquisition is a good opportunity. We'll also hear from best-selling Wall Street author Scott Patterson about his new book, Chaos Kings. And I might say a couple of words about beer. None for me until at least the 10-minute mark, thanks. Listening in, our audio producer, Metta. Hi, Metta. Hey, Jack. There's a new top-selling beer in America.

The longtime leader was Bud Light. The new leader is Modelo Especial. I think people are going to find that surprising. I don't think people would have guessed that. If you gave them 10 guesses about what was the second best-selling beer in America, I don't think they would guess that. What do you think? I don't think so either.

I think they would have said Coors Light, Miller, even maybe a foreign beer, Stella. And if you said, I'll give you a hint, the number two selling beer is a Mexican brand. I still don't think they would have guessed Modelo Especial. I think they would have said Corona. Corona, for sure. So I want to say a few words about how Modelo Especial got in this position and what it means for the company that controls it here in the U.S., Constellation Brands, ticker STZ. In doing that, we have to talk a little bit about Bud Light and the boycott among some

conservatives against the brand. You know, Meta, the politics are not really my, I break out in a rash. You love it. I break out in a rash when I start talking politics or anything to do with culture war stuff. I'll just say a few words. People have surely heard the story by now. Bud Light had a promotional partnership with a transgender Instagram influencer. And they had made a commemorative can with her face on it. That was not a can that they sold in stores. It was just something that they did as kind of for her. And she showed it on her Instagram account and there was a backlash. And at some point the musician Kid Rock put out a video

of himself with a rifle shooting up cans of Budweiser. And it just kind of snowballed from there and it became a big boycott. Sometimes you don't know how long these things are going to last or how broadly they're going to take hold. But there has by now been a meaningful sales impact for Bud Light, a big sales decline. And so, although it's true that Modelo Especial has been an incredible grower,

it was this recent decline for Bud Light that moved it out of the first place spot and put Modelo as number one. Now let's get to Modelo. I don't know, how far back should I start this story, Matt? Is 1864 too far? I mean, that's when Maximilian I was proclaimed emperor of Mexico and he was born in Vienna and he was a member of the House of Habsburg-Lorraine. And he and his inner circle brought with them to Mexico a love of Vienna-style beer. And that began sort of a European-style brewing movement in Mexico. Now jump ahead to 1925.

That's when Grupo Modelo was founded in Mexico and it became the biggest beer cellar there. And it makes both Corona and Modelo Especial and a bunch of other beers too. Now 1945. I'm moving quickly, right, Meta? By the speed of light. That's when Marvin Sands,

who was the son of a Queens, New York vintner, bought a Canandaigua, New York sauerkraut factory that had been turned into a bulk winery. And what Marvin needed was a brand. King Solomon kosher wine, it didn't quite take off. But Richard's Wild Irish Rose, named for his son, was a massive hit. This is kind of high alcohol, sweeter wine, screw cap type of situation. Pairs well with a brown paper bag, if you see what I mean here. Got it. Okay, so Marvin Sands died in 1999 and the next year the company changed its name to Constellation Brands. The

company over the years has made a push upscale in wines and spirits. And three years ago, it sold off 30 of its low-end wines to E&J Gallo. And that includes Rosie, as that Richard's Wild Irish Rose is sometimes called. Okay, now in 2008, this American beer icon, Anheuser-Busch, maker of Budweiser and Bud Light. It merges with a European beer giant called InBev. And that company later buys Grupo Modelo in Mexico. And to satisfy antitrust regulators, it has to sell the U.S. operations, U.S. rights to Corona and to Modelo beer. And so who is it going to sell to in the U.S.? Who wouldn't be a threat of gaining too much share in beer? Well, Constellation Brands, because it's mostly into wine and liquor. And so that sale happened 10 years ago. And before that,

I don't think Corona was all that heavily promoted in the U.S. You could buy it here and it was promoted, but little things like like you couldn't find it in cans, that sort of thing. And when Constellation came into these brands, it now had a perpetual license to distribute these beers in the U.S. And so it was worth it for Constellation to make the investment to figure out how to sell these things better. And that's why you've seen no end of Corona ads and new ways to distribute it. You might see it on tap. You're seeing new types of beverages, hard seltzers and so forth with the brand. And so I think typical American beer drinkers are very familiar with Corona.

beer drinkers are very familiar with Corona. I don't think they're as familiar with Modelo Especial, but Modelo is actually more of a premium beer in Mexico. And it passed Corona in sales, dollar volume of sales, several years ago. And there are a couple of things that lead me to believe that Modelo Especial might have a lot more growth ahead of it here in the U.S. One of them is that it has a greater than 10% share in only four U.S. states. In other words, it's not popular everywhere. It's only popular in some states, chief among them California. Number two is the population of drinking age hispanic americans is growing much faster than the the rest of the population of drinking age consumers and that's half the customer base for this beer and number three is i think the medello beer has only really begun to be marketed beyond

hispanic drinkers here in the u.s i think there's a lot more potential there. If you think about Corona, that is firmly in people's minds as, how would you say, Meta? The party beer, the beach beer. Sit in a lawn chair on the beach beer. Yeah. A Corona and palm trees. I've seen the commercials with Snoop Dogg and Adam Sandberg.

A Corona and calm seas. Andy Sandberg? Sorry, Andy. Everyone calls Andy Sandberg Adam Sandler at some point in their life. But they always get it right in the second try. Anyhow, so I don't even have an image in my mind of what Modelo Especial is.

There's a deal with the UFC, the fighting circuit, and it's something of like the fighting beer, but I don't think that's, I think there's endless potential to do something to tell people what this beer is to make it even more popular than it is, which is my way of saying, you know, maybe this is a fluke because of the decline in Bud Light, but I wouldn't be surprised if Modelo Especial and its parent company Constellation have a long runway of growth ahead in beer. Constellation trades under the ticker STZ. It's funny they didn't want the ticker CON. CON for Constellation.

No, they didn't. You know, funny enough, that one is totally available here in the U.S. It's wide open. Anybody wants CON for a ticker. It's STZ for Constellation. And the fact that it's growing so nicely in beer does not necessarily make its shares a good deal. I mean, they might be too expensive. They trade at 21 times earnings. Anheuser shares are a little cheaper. They're closer to 18 times earnings. My

colleague Andrew Barry recently wrote that he thought Anheuser stock was a good deal because the controversy will eventually pass and it'll bounce back. We'll see. What do you think about it? Have we hit the important points on beer? I mean, there have been some archaeological finds about fermentation in ancient Mesopotamia, which we didn't even... It's the 10 minute mark somewhere. That's an interesting approach to time zones. So let's move on to NASDAQ. NASDAQ stock fell 12% on Monday after the company announced a big acquisition of a financial technology company. And I had a chance to speak with NASDAQ CEO Adina Friedman, and she says she can understand why investors have questions. Evenman, and she says she can understand why investors have questions.

You know, if you think about you're an investor and you wake up on Monday morning and you learn about this deal, you know, what we're finding is the first thing is, what is Adenza? Because it was owned by private equity. It wasn't a public company, so they're not as familiar with it. For background, Toma Bravo is a private equity firm and they created Adenza, this software company, in 2021 by piecing together two businesses. One is called Calypso and they sell risk management products for capital markets customers. The other is called Axiom SL and they sell largely to big banks. They have regulatory and compliance software. NASDAQ, meanwhile, is best known, I guess, as a marketplace for stocks. People say this or that stock compliance software. NASDAQ, meanwhile, is best known,

I guess, as a marketplace for stocks. People say this or that stock trades on the NASDAQ. It's also known for indexes. People ask, what's the NASDAQ doing today? And in the past, a lot of their revenue has been pretty volatile. One of the things Adina has done since taking over in 2016 is working to increase the amount of money the company makes from more stable sources, selling data, providing market architecture for other countries that want to set up exchanges. And one of the newer pushes is an anti-money laundering business. We've had Adina on the podcast before, and we've talked about all of that. Now, Toma Bravo wasn't selling Adenza. NASDAQ approached them with an offer. The deal price is $10.5 billion. That's $5.75 billion in cash and a lot of stock. And it was equal to about 40% of NASDAQ's market value. So this was a big deal

for NASDAQ. NASDAQ has obtained bridge financing to do the deal, and it's expected to eventually replace that by issuing debt, about $5.9 billion worth, with a blended interest rate of 5.5% to 5.7%. It's also expected to pay that down over the next few years. Its share count will increase by 17%. There, too, it can eventually buy back stock to offset that down over the next few years. Its share count will increase by 17%. There too, it can eventually buy back stock to offset that increase. UBS called the deal price steep, 31 times EBITDA or about twice NASDAQ's valuation. It says it expects the deal to be dilutive to earnings, in other words, to subtract from earnings for the next two years dilutive to earnings. In other words, to subtract from earnings for the next two years and ultimately add 6% to earnings, but not until 2027. It says the deal will help round out

NASDAQ's offerings and give it a lot of cross-selling opportunities. But it also says there's some execution risk and it points out that Toma Bravo will hold a 15% equity stake in NASDAQ, which it says will be an overhang for some time. In other words, investors might be wondering if or when Toma Bravo will eventually sell that stake. And so UBS has the stock rated at neutral. Now that's, I think, a fair summary of investor concerns about the deal and why the stock price fell off. Let's hear from Medina about what she finds attractive about Adenza. One key factor is what she calls a super sticky client base. It's a business that has a super sticky client base with 98% gross retention, 115% net retention of its clientele.

So it does a great job of expanding in their clients and serving them with more and more capabilities. And it has a very loyal client base. It has 80% annualized recurring revenue. The vast majority of their revenue is contracted revenue. The other 20% is implementation revenue, which they do a great job of serving their clients with. Those recurring revenues and long-term contracts and customers who tend to stick around, that's going to serve to further reduce Nasdaq's revenue volatility and maybe ultimately make the stock more attractive. But for the deal price to prove worthwhile over time, Nasdaq and Adenza together are going to have to prove more valuable than they would have been apart. Adina says they're complementary. Adina says they're complementary. They have a few clients in that space, but they do different things for them. But we have an opportunity to open a lot of doors to kind of bring their complementary services into that clientele.

They have a very broad base of banks and brokers that leverage their critical infrastructure technology and their reg tech technology. And we have an opportunity to bring Verifin or antiame crime technology, more successfully into their clientele, to expand our surveillance technology into their buy-side clients. They also serve central banks, which is really interesting, the banks and brokerage community, and the sophisticated buy-side. And when we think holistically about all of the ways that we can serve them, we can open a lot of doors for each other around the world with, I would say, very, very complementary capabilities. When I looked at NASDAQ stock recently, it had returned about 163% since back when Adina was announced as CEO. And that compares with 127% for the S&P 500 index. In other

words, Adina has been an outperformer for Nasdaq shareholders. What happens next will depend in large part on whether Nasdaq can turn Adenza into a success. There are plenty of examples throughout history of company deals that were announced where investors scratched their head and said, that's an awful lot of money. For example, almost every deal that Bob Iger did at Disney, Pixar, Marvel, Lucasfilm, people said that's a lot of money to pay for those properties. It turned out, of course, that Disney had a lot more ways to make money with those properties than other companies had. In the parks, and with the merchandise, and now with the streaming platform. And those became huge successes.

Of course, there's been many more examples where companies just simply overpaid. So is a Denza a Pixar, or is it overpriced, or is it something in between? We'll be watching with interest to see over the next few years. Thank you, Idina. And that's a good place for a break. Coming up, we'll talk about the new Scott Patterson book, Chaos Kings, how Wall Street traders make billions in the New Age of Crisis. That's next. Welcome back. Scott, are you ready to commence podcasting? Let's do it. I should tell people you and I worked together around 20 years ago at a fine publication called smartmoney.com. Well, first of all, let me just mention, we exchanged emails last night. You asked, are we going to be doing video? Should I comb my hair? I said,

no video, but let's turn on the cameras. You don't have to comb your hair. I said, I promise to be older, fatter, and balder. And you said, I told you not to eat that KFC. Now, I don't know if this is comic or tragic, but did you realize I had just had KFC for dinner? That's not surprising. I'm not a regular KFC guy. It's finger licking good. You told me a story about your KFC eating habits once that has haunted me ever since. For 20 years? Yeah.

For a split second, I thought, has Scott been watching me? Did he see me go to that KFC? All right. Well, so just a coincidence. You're in the Washington area and we kind of still work together because you write for the Wall Street Journal and Ahmed Barron's and they're part of the same company. But I haven't seen you for many years. And since I last saw you, you have emerged as first of all, a bestselling author. And it's,

it's kind of a unique group of subjects that you've written about. You write these very engaging and readable and enjoyable stories about, it's almost like someone dared you to choose these topics you write about algorithmic trading and high frequency trading and dark pools and flash crashes what made you want to pick these kinds of obscure subject how did you get it your first book was called the quants what got you interested it's just an offshoot of my daily job at the wall street journal what i was doing back then, I was in New York covering hedge funds. And we had this little financial crisis that happened

around 2008. I've heard of it. And a lot of the people I knew were deeply involved with what happened. And it was kind of interesting with the quants. I initially started that book in late 2007. of interesting with the quants. I initially started that book in late 2007, and a lot of the subjects of the book were on board with me. They were cooperating, talking a lot. And then all of a sudden, sometime in 2008, they stopped picking up the phone. So things had gone badly for them, and billions were lost. So it turned a little bit into more of an investigative story, trying to figure out what happened. And, you know, they're colorful characters. I mean, I try to bring the characters to life.

These are fascinating people with rich histories, outsized personalities. And all you have to do is just talk to people who know them and get some good stories. Okay, your new book is called Chaos Kings. First of all, I just like the way that sounds. I feel like we could start a bowling team with that name right now. It could serve a lot of different purposes. But in this context, what is a chaos king? This is someone who profits from betting on highly unlikely events. Have I got right yeah that's right they thrive in chaos basically

when everybody else is getting demolished in the markets these guys are making hundreds of millions or billions of dollars because all they do is bet on major market downturns so i tell the story of you know how this strategy arose in the late 1990s through two guys, Nassim Taleb, who people know as the author of The Black Swan, and his partner, Mark Spixnagel, who founded the first Chaos King fund or Black Swan hedge fund called Empirica. And when we say Black Swan, that's a sort of nickname for a highly unlikely event. And when we say black swan, that's a sort of nickname for a highly unlikely event. Yeah, I mean, it's become so widely used because Taleb wrote this book in 2007 called The Black Swan. I think the idea is a black swan is rare, right? Are they generally white? It's not just that they're rare, they're completely unforeseen.

Europeans once thought a swan is white. That is the definition of a swan. And then black swans were discovered in Australia, so it was just something that was not expected at all. And you could say various events in financial markets are like black swans, like Black Monday of 1987, 9-11, the 2008 financial crisis. But basically, it's just a catch-all phrase for crazy stuff happening generally in financial markets. You say it's a profitable business. How is that the case? I would think that if you bet on that stuff happening, you're just wrong and wrong and wrong all the time.

And then every once in a while, you're right. How do you make money without it as a business model? Yeah, well, I guess that's the trick, you know, because there are a lot of firms that try it and give up after a few years. But these guys have figured it out because they've been doing it for more than 20 years. Empirica, the first hedge fund that did this, lasted through 2004, mainly because of what you're talking about. It's very hard emotionally to take that constant day-to-day loss. And Taleb apparently just couldn't take it anymore. He thought it was having a bad effect on his health. So they shut that down in 2004.

And then Martin Spitznagel relaunched the strategy in 2007, and that hedge fund is called Universa, and that's still trading, and it's been extremely successful. It's now a $20 billion hedge fund, and they've had an incredible track record, despite the fact that, yeah, for years, they will go without any gains, which is kind of like the exact opposite of what you're supposed to do. Wall Street likes steady, smooth day-to-day gains, little losses here and there. The problem with that is those strategies are often taking hidden risks and use leverage. And when things go wrong, they go wrong badly. And that's kind of the discovery that they made is that what's really important to survive long term isn't making steady day to day gains. It's avoiding the crashes that can totally wipe you out. What kinds of bets are we talking about? Are they making bets that the stock market will crash? Are they making bets that bond default spreads will suddenly widen? Or is it a

lot of different things? Is there a favorite type of bet that they make? Universa is almost exclusively focused on equity markets. So they're buying far out of the money options that will pay off with like a 20% decline within a month. That's pretty rare, right? Although those options, they're subject to a lot of volatility. So even in like big moves that aren't 20%, those options will skew radically higher. And we're talking major changes like, you know, an option bought for $2 can go to 60 bucks. In other words, you buy an option that says that the stock market will fall by 20%. It only falls by 10%, but that option becomes more valuable just the same to someone else buying it, and you make money.

Yeah, you can take advantage of those moves from time to time, which Universa does, if there are various periods of volatility that the market goes through that aren't necessarily like huge crashes, and they can monetize their portfolio so why is universa doing so well at this when other players who attempted this before didn't do as well is it because they figure something out that the others hadn't figured out or is it because the world is getting crazier you know i always struggle with this is the world really getting crazier or is that something that each generation just says? Right. It's hard for me to figure out, but I feel like we have these events of financial kablooey that come up and they seem to be, I mean, I've seen a few of them already during my lifetime

and I'm 50 and you know, is the world getting crazier and these strategies are becoming more lucrative or are they just better at at uh executing these strategies yeah I think the world is getting crazier and the idea for this book came to me in early 2020 when you just couldn't help but think look around like oh my god like you know you had riots in the streets you had a pandemic you had 20 unemployment that certainly fits the streets, you had a pandemic, you had 20% unemployment. That certainly fits the description, but that doesn't fall under the category of something that where you could predict the frequency of an event like that or does it? Something that really caught my eye is, you know, I was looking at what Universa had done in early 2020, and they had this phenomenal gain of 4,000% in the first three months of the year, 4,000% on a sizable portfolio.

That's a good year. Yeah. And then I came across a paper that Nassim Taleb had co-written in January of 2020 about COVID-19, warning that this thing was extremely serious, posed systemic risk, and extreme actions need to be taken to protect the world against it. And I talked to him. He said, he and his co-authors had sent that to the White House. So this is January 2020. And it kind of occurred to me, I, in January 2020, had heard of COVID-19. I think I'd read about it. I had no idea

about the risk it posed. And so you had these two people in periods of extreme risk, danger, market volatility, who came out looking pretty good. Like Nassim, having written that paper in January, showed the way he looks at the world, he's able to understand these risks. And he's able to understand these risks. And he's been concerned about pandemics for a long time. And this is an issue that I try to dig into in the book is when something poses, you know, what Nassim and his co-authors would call systemic risk to humanity, you can't sit back and assess all of the details of the risks you're facing to try to figure it all out. You need to take immediate action.

So they came up with a catchphrase called panic early. And you look at other similar risks that I try to address in the book, like climate change, which is, you know, a systemic threat. And climate scientists have been warning for years and years, we need to really worry about this. The earlier we address it, the less harm we're going to face. And I think it's interesting how different ways of risk management cross over, like, you know, issues of pandemics, climate, financial markets, which is kind of what the book is about. What is the next financial topic where someone's going to say,

you can't possibly turn that into a book that people will not be able to put down and you're going to take on that challenge? Well, what I'm doing now with the journal is covering climate and clean energy. And I remember reading a quote by Michael Lewis, and he was saying his daughter keeps asking him to write about climate change. But he's like, well, I don't see anything interesting about it. Like there's got to be some secret billionaire making money on clean energy. So even Michael Lewis doesn't think it's a good topic to write about. But I'm thinking about it.

Thank you, Scott. And thank you, Adina. Meta, I thought of a parting Corona tip. You ever get a bottle of Corona and it tastes a little skunky? No. No? Really? Where do you buy your Corona?

No, that's the whole thing. That's something that Corona is known for. Sometimes you get a skunky bottle. It's because the bottles are clear. The marketers want the clear bottles. That's part of the whole brand's persona, but it's terrible for letting an ultraviolet light, which can damage beer and it gives you that skunkiness. Beer doesn't want to live in clear bottles. It wants to live in brown bottles. You know, where it really likes to live is in cans by your Corona and cans, or there's a brown bottle cousin to Corona called Corona familiar. That's my tip of the day on Corona. What if you're into skunk? Then you stick with the clear ones.

I don't want to anger the skunk beer community out there. Meta loot soft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review. See you next week.