This is why Playtech is buying crisis-hit trading company Plus500

David Paul Steicke looks at his competition after checking his cards at the second event of the Epic Poker League Inaugural Season during the Main Event Day 4 at Palms Casino Resort on September 9, 2011 in Las Vegas, Nevada.Jeff Bottari/Getty Images for Epic PokerDavid Paul Steicke competing during the Epic Poker League Inaugural Season. Playtech provides online poker software.

Online gaming company Playtech’s £459.6 million ($US702.05 million) deal to buy troubled contract for difference (CFD) company Plus500 has left many people scratching their heads this morning, not least Playtech’s investors who have sold shares on the back of the news.

Plus500 doesn’t look like a great business right now — shares have collapsed over 50% since the UK’s financial watchdog told it to freeze all customers’ trading accounts and fix its anti-money laundering checks two weeks ago.

Playtech doesn’t look like the most obvious buyer either. The Israeli company’s core business is gambling software, working with the likes of William Hill and Ladbrokes. The idea of a gambling company buying a trading business would make most regulators break out into a cold sweat.

But the key to the deal is the technology at the heart of both companies.

Playtech founder Teddy Sagi sees his business as a technology play, not a gambling company. Its software has up until now been used to crunch through bets and wagers online and in gaming machines, but there’s other stuff it can be used for — namely processing financial trades.

In April the company made its first foray into the world of finance when it bought TradeFX in a €458 million (£327 million/$US500 million) deal.

TradeFX has a strong business in CFDs, a form of trade that lets people effectively bet on shares or currencies. These are one of the fastest growing areas of finance and Playtech saw TradeFX as a good way to use its software to make money, at a time when gaming machines are coming under increased political pressure in the UK.

Buying Plus500, the UK’s second biggest CFD provider, is a way to build out this new financial business. Plus500 will be rolled into TradeFX, with Playtech CFO Ron Hoffman heading the enlarged business.

Not only will the acquisition grow Playtech’s financial business, the two companies will compliment each other. Hoffman told a call this morning: “Plus500 was very focused on product and marketing, not CRM [customer relationship management], which is why we see there’s a great opportunity to combine this.”

Plus500 tries to pull in as many customers as possible, with less focus on keeping them. CEO Gal Haber told investors at last week’s AGM that the average account holder was with Plus500 for just 18 months.

Playtech are betting that by using existing software from TradeFX and its own back catalogue it can squeeze more cash out of Plus500 customers by keeping them interested for longer. On the other hand, Plus500’s superior CFD platform can boost TradeFX.

Hoffman said: “You combine two different best of breeds in different parts of the verticals.

“Our plan is to run one, best of breed offering. We will maintain both brands because both brands are strong and strong in different markets. From a technology perspective, we will make sure we’ve got best offering for both.”

Playtech also think regulatory issues are overcooked. Hoffman said: “We believe it’s a very good business that underestimated its requirements as it grew.”

It sees Plus500’s current predicament as a man power issue, not a fatal flaw. A key sell to Plus500 investors is that Playtech has the know-how and resources to sort out the current crisis. Playtech operates around the world and has plenty of experience dealing with watchdogs.

There’s also another big reason for the deal — it’s a bargain.

Plus500’s recent share price collapse means that Playtech is getting technology and customers on the cheap. And the fact that Plus500 looks like such a basket case from the outside means it’s in a pretty weak bargaining position.

“In respect of recent issues, we saw an opportunity and acted quickly,” Hoffman said.

Hoffman also hinted that break clauses in the contract will also allow it to walk away if the business’ current problems prove to be worse than forecast.

From a technology and growth perspective, then, the deal makes a lot more sense.

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