Plus500 Fiasco takes new twist in its fourth week – Sharks enter stage left

Chris Lee

There is a corporate maxim that goes, “When the going gets tough, the tough get going.” On the face of it, one might think that, when times are at their worst, the best leaders in a firm step forward to save the day. The more subtle take, however, is closer to reality. When a company begins to show signs of trouble, the more competent staff members are already aware that their opportunities may be on the wane. They line up better jobs and depart the scene, well before disaster sets in. Competitors also begin to peck away at what is left, such that the ones remaining are the least capable of running the enterprise. This scenario is playing out with Plus500, as the IG Group sweeps through.

The Plus500 story is the gift that keeps on giving. Regulators have acted very overtly. Stockholders and clients are in revolt. A takeover bid is on the table. Conspiracy theories are swirling about, and corporate vultures are circling the carrion, on the lookout for the best tidbits to steal and consume. The story continues to unfold like a five-act play, with drama and intrigue that would surely make Machiavelli and Greek play writers of old proud. The sharks have now entered from stage left to join in on the fun, with a cast of characters that grows with each passing day:

  • The Scapegoat: Plus500 is the beleaguered Binary/CFD broker that has been pilloried in the public square because it played it fast and loose with internal AML documentation procedures, a must have for a global broker these days;
  • The Protagonists: The Financial Conduct Authority (FCA) fills part of this bill, deciding to make a grandstand play in the press of public opinion over documentation infractions at Plus500. As a result, over one-half of the Plus500 client accounts were frozen with little in the way of explanation. It now appears that a companion regulator, the Securities and Futures Authority, may have also disclosed the infractions to market participants. Company shares were shorted when the crisis hit, and shareholders saw $650 million in stock value go up in smoke;
  • The White Knight: In an apparent attempt to grab a bargain on the cheap, Playtech, the world’s largest online gaming software supplier traded on the London Stock Exchange, submitted a takeover bid that was half of the value of Plus500 shares at their peak, and management, in an obvious attempt to avoid accountability and get rich quick, accepted the terms immediately;
  • The Injured Bystander: Collateral damage is all about, as shareholders contemplate their next move after losing $650 million in value, but the one that lost the most individually was Odey Asset Management (Odey), a hedge fund that now owns over 25% of Plus500 shares. Odey has protested the outright opportunistic takeover bid from Playtech, staging a revolt to block the merger from ever taking place. They need another 25% to be successful;
  • The Evil Villain: The IG Group (IG), a direct rival of Plus500 and also a UK-based firm offering financial derivatives, CFDS, and spread-betting services, has been portrayed as the behind-the-scenes instigator of the attack against Plus500 in the first place. Conspiracy theories abound that IG actually loaded the bullets in the FCA gun before sanctions were enforced. IG has also been accused of trying to steal Plus500 staff on LinkedIn, but IG claims that it is opening an office in Israel and in the process of staffing up the venture.

Who is the IG Group and why are they involved?

To keep margins high, the number of competitors must be kept to an acceptable few by either driving them out or buying them out. Mergers and acquisitions, however, tend to be very expensive affairs. If they can be avoided or manipulated in some way, then the price goes down. Greed does make the world go round in some circles, but the protagonists will usually prefer to operate in the background to protect their carefully crafted image of helping the public in their wealth building pursuits.

The IG Group is just one more player in this market, always looking to grow and expand its market share. It, too, deals in CFDs and is a direct competitor of Plus500. They both go head-to-head in the marketplace, offering up innovative products and services to gain new clients on a global basis. Both companies are also traded on the London Stock Exchange, but the similarities stop there. Plus500 only recently went public in 2013 and quickly achieved “darling” status with investors. The IG Group has been around since 1974 and went public in 2000. It then went through a period of stock buy-backs and private ownership, but re-emerged in 2005 on “the main list of the London Stock Exchange with a valuation of £393 million.”

The IG Group also suffered material losses when Swiss National Bank officials lifted the Swiss Franc peg to the Euro, the so-called Swiss Franc Debacle back in January of this year. IG has refused to take responsibility for nearly £20 million in losses that exceed the combined net worth of roughly 200 clients, who have allegedly requested the FCA to conduct an investigation. This affair may have fueled the rumors that IG, apparently wounded by the regulators on one front, may have elected to use the FCA to wound their direct competitor, Plus500, with the regulator’s sword. Who can say for sure?

The supposition of market analysts, however, is that the management team at IG has definitely been bothered by the sudden success of its small Israeli competitor, as both companies opened offices in similar markets and went after the same base of potential customers. From a size perspective, the market cap of IG is a whopping $4.3 billion, much larger than the $702 million offered for Plus500 shares by Playtech. Playtech, on the other hand, is valued at just shy of $3.7 billion. Will IG suddenly become a “Whiter Knight, so to speak? If the fight is enjoined, a battle of titans will likely ensue.

What is the latest status of the Plus500 Fiasco?

Several Internet news channels were ablaze today with the new IG involvement in the Plus500 story, that being the one pertaining to raiding the firm’s employee base for its own future needs. Playtech was quick to respond that, “Playtech regards Plus500’s employees as its main asset, and the purpose of the merger is not to cut back its business; it wants to expand and extend it. The company founders have already announced that they will stay employed at the company after the merger, and we anticipate full cooperation with them and the other employees in stabilizing and developing its activity.”

Work is proceeding positively at Plus500 on reactivating nearly 25,000 in frozen accounts. The firm reported that, of the 10,147 clients that have updated their AML identity documentation, nearly 85% of those have been reactivated. The more important figures relate to activity and retention. Of those reactivated, 61% are actively trading, and the attrition rate, those that have withdrawn their funds, is only 5%, or 457 very disgruntled customers. It is beginning to appear that, aside from a number of loud protesters, the vast majority of Plus500 customers have been willing to trust management and give them the benefit of the doubt. That conclusion, however, could easily change over time, since there has not been adequate time for anyone to review prospective alternatives, evaluate the options, and then make a switch in broker.

As for the merger, Playtech could still decide to walk away, while IG could mount a takeover bid of its own making. Odey Asset Management still opposes the deal, is accumulating shares, and pushing hard for a higher bid from Playtech. The market is not impressed. Shares for Plus500 continue to hover about 6% below the £4 per share bid from Playtech. The market is saying that there is some completion risk associated with this deal, which could emanate from several sources – shareholders voting the deal down; regulators withholding approval; or a potential counter bid from someone like the IG Group. All is possible in corporate warfare, and so the beat goes on.

Concluding Remarks

It is interesting to note that there may be game playing going on in the background, as the Plus500 Fiasco and its crazy cast of characters ply their various tactics about the stage of financial services. The protagonists are all players in the gaming industry, where profit margins are great, and acts of war are intense. We have yet to hear if any potential litigation from disenfranchised shareholders is going to rain on this parade, but when so much money is involved, both in the deal transaction value and in the loss of value in Plus500’s share price, the potential remains high for legal intervention.

For the time being, the Plus500 story has completed another chapter for another day. What will transpire over this weekend, as we head into the fifth week of this multi-faceted storyline? What new characters will make their entrance on the scene to stir the pot that may be over stirred at this point? Will a Whiter Knight make an appearance with a more lucrative bid for shareholders? Stay tuned, because, as Yogi Berra would surely have quipped, “It ain’t over ‘til it’s over!”

Chris Lee

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