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ICE has a lot of experience electronifying inefficient markets, like futures, bonds, equities & options. Mortgages look like another instance of taking a paper process and putting it online, cutting a ton of costs by doing so even if it isn't a "market" like its other segments.
MERS and Simplifile have a lot in common with ICE's derivatives clearinghouses. They act as databases/systems of record and involve a lot of legal/compliance burden. This makes them incredibly hard to disrupt once critical mass is reached.
Another similarity with electronic markets is the idea of building network effects across a large customer base. Traders & back-office firms can be very set in their ways and have to be convinced to try a new way of doing business. ICE knows how to do that convincing well.
I could see ICE putting MERS and Simplifile onto the Ellie Mae system to create one mortgage loan & back-office super platform that serves the whole pre & post-close cycle.pic.twitter.com/Tl5SmbJHaX
Despite the upside I think the market is hesitant on ICE for two reasons: 1. Price - ICE paid too much for these deals 2. Saturation - too far along the mortgage S-curve
On the Price front - ICE paid $11.5B for ~$600M in annual EBITDA of these combined businesses. While growth looks good for now, paying 19x EBITDA for anything is a hard sell. Growth has to be stellar for the deals to pay investors back.
On the saturation front - where are we on the mortgage digitization S-curve? ICE thinks there's a large TAM left to fill here, but I'm not sure everyone agrees on what's achievable. MERS for example has 85% market share - is that extra 15% worth the high $ tag?pic.twitter.com/DhAPg89k5f
The ICE mortgage debate is a hard one to decide - did Sprecher make a well-timed push into a market with plenty of room to run, or did he overpay for an already mature set of platforms with no overlap to his legacy exchanges?
I'll be diving more into this debate in an upcoming premium post - sign up below before August 1 and get a 20% discount on the annual price:https://frontmonth.substack.com/1b8b8f63
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