HALIFAX — Newfoundland and Labrador-based anti-financial-crime software firm Verafin has agreed to be acquired by stock-exchange operator Nasdaq in an all-cash deal valued at US$2.75 billion. 

The proposed deal comes just over a year after Verafin clocked the biggest venture funding round in Canadian history: a $515-million equity and debt recapitalization deal to help build out its product innovation and land bigger clients in the banking sector. At the time, Verafin CEO Jamie King said the windfall would allow the company—the biggest tech firm in the province—to keep growing while remaining independent. While the Nasdaq deal sees Verafin abandon the latter priority, it opens up its business—providing financial institutions with a cloud-based platform to help them detect, investigate, and report money-laundering and financial fraud—to the hundreds of firms that use Nasdaq’s financial-fraud-detection services.  

Here’s a closer look at the factors driving the deal—and who’s set to profit should the acquisition go through.

The fundamentals: Nasdaq’s purchase is based on Verafin’s strong growth and customer-retention rates. The 17-year-old company has more than 2,000 customers in the banking and credit-union industry, with a retention rate of 98 per cent, according to a report Nasdaq prepared for investors. Nasdaq expects Verafin to grow about 30 per cent year over year in 2021, citing its 97 per cent recurring revenue—that is, predictable future revenue that the company can rely on, based on client contracts.

King declined an interview with The Logic, but said in a statement that Verafin “felt [Nasdaq’s] DNA strongly mirrored our own core values: innovation, teamwork, entrepreneurship, and a commitment to continued growth and development. Together with Nasdaq, we will be a clear leader in expanding the fight against illicit finance by delivering our capabilities to a global client base from our headquarters in St. John’s.”

The financials: Nasdaq is tentatively ponying up US$2.75 billion, but that purchase price is subject to adjustments—the deal still needs regulatory approval; it’s expected to close in the first quarter of next year. Verafin was valued at $1 billion before the deal. Nasdaq’s purchase price was based on projected revenue of over US$140 million for 2021—up from just US$15,000 in 2013, according to PitchBook—multiplied by 19.5, “in-line with other [software-as-a-service] companies,” reads the report to investors. That values Verafin at US$2.73 billion, or more than $3.5 billion. Nasdaq estimates the company will be leveraged by about 3.9 times when the deal closes—a feature of Verafin having borrowed undisclosed sums from the likes of Scotiabank and Wells Fargo—but it expects to “de-lever over time.”

The market opportunity: The anti-financial-crime sector is a US$12.5-billion industry expected to see a compound annual growth rate of about 17 per cent from now until 2024, according to the investor report. Driving the market is an uptick in more sophisticated online financial fraud, and more scrutiny from regulators to manage and prevent such crimes. For Nasdaq, the deal is also part of a broader push into the data and intelligence market. In 2018, Nasdaq bought Toronto-based alternative-data provider Quandl for an undisclosed sum; the year before, it paid US$705 million to buy eVestment, a data, content and analytics platform for institutional investors. Nasdaq noted that the Verafin acquisition would increase its “expected revenue contribution from the highest-growth Market Technology and Investment Intelligence segments to approximately 47 per cent of pro forma third quarter of 2020 total net revenues”—up from what was 45 per cent without Verafin—and expand “the percentage of Nasdaq’s [annual recurring revenue] coming from SaaS products and services.” 

Overall, the deal is expected to boost Nasdaq’s organic-growth revenue outlook from between five and seven per cent to between six and nine per cent. For Verafin, the deal could open up a new customer base. Most of its clients are smaller financial-service providers with less than US$50 billion in assets under management. Nasdaq identified financial institutions with US$50 billion to US$200 billion and above in assets as a “sizable untapped” market for Verafin. 

The winners: Verafin’s founders—King, Raymond Pretty and Brendan Brothers—are poised for a substantial payday, as are its investors. The St John’s-based firm is privately held and has not disclosed its ownership structure, including what stake the founders and the roughly 600 employees have relative to its many investors. The company has raised at least $585 million, based on publicly disclosed deals. Its investors, the majority of which are Canadian, include Crown corporation BDC Capital, Montreal-based firm Teralys Capital, Toronto-based Information Venture Partners, and Boston-based firm Spectrum Equity. (Investors whom The Logic contacted Thursday either did not respond before deadline or declined to comment because the deal hasn’t yet closed.) Given the acquisition was an all-cash deal, shareholders can likely expect a cash return for their stock. 

Some early investors were already paid out in earlier deals. For example, Killick Capital’s Mark Dobbin—who sits on Verafin’s board—sold his stake in the company to Spectrum Equity. (PitchBook reported that Dobbin sold his stake for $60 million; Dobbin told The Logic that the figure was inaccurate, but declined to disclose the actual price.) Verafin used some of its $71.5-million raise that year to pay out other investors, according to PitchBook. 

The hometown advantage: Hard dollars aside, the fledgling St. John’s tech industry sees the deal as a boon for the community. “The fact that they have attracted such a world-leading company, and this deal size is so significant, not only for the province, but for the country,” said Michelle Simms, president and CEO of Genesis, a tech incubator in the city run by Memorial University of Newfoundland. “This means that entrepreneurs are going to be looking at that company, and drawing inspiration from it in Newfoundland and Labrador. It proves that we can be on the global stage and gives those entrepreneurs that extra push that they need to build and grow those amazing companies.” 

Simms said she isn’t concerned that the local tech darling will now be controlled by a U.S. corporate giant. “Any entrepreneurial ecosystem needs a wide variety of companies at every growth stage. Acquisitions are an important part of that because they bring capital, talent and significant global partners.” That Verafin plans to stay in St. John’s and grow its team locally also helps, she said. While Genesis is largely responsible for incubating Verafin—the company spent its first three years at the hub where it had access to workspace, mentorship and resources to help access capital—the centre has already reaped its rewards from the company’s earlier success: like all companies incubated at the centre, once Verafin reached $1 million in gross sales, it began paying Genesis a two per cent royalty on those sales for the next five years.