Intercontinental Exchange Completes Its Acquisition of Black Knight

Nearly a year and a half after the initial announcement, wide-moat-rated Intercontinental Exchange ICE has completed its acquisition of Black Knight, a firm that offers data and software services for the real estate and mortgage industries. In general, we like the underlying strategy of the deal as Black Knight’s data assets will help drive Intercontinental’s broader vision of a fully electronic mortgage lending process and a more efficient mortgage bond market, while Intercontinental’s mortgage technology business will benefit from reduced cyclicality as Black Knight’s dominant mortgage servicing software business will add reliable recurring revenue. That said, we believe the attractiveness of the deal has been negatively impacted by the steps Intercontinental had to take to get the deal approved by the Federal Trade Commission.

As part of the acquisition, the firm will divest Black Knight’s Optimal Blue mortgage pricing engine and its Empower loan origination system to Constellation Software. We never expected Intercontinental to retain Empower, as the firm is already the market leader in that space through its Encompass product and the merger of the two would have given the firm near total market dominance. However, Optimal Blue was part of the original strategic rationale of the deal due to its secondary marketplace for mortgage loans. To make matters worse, Intercontinental is not getting a good price for the business, receiving only $700 million, compared with Black Knight paying more than $1.1 billion for the remaining 40% in early 2022. Conditions in the mortgage industry have deteriorated since then, but Constellation is likely getting a good deal due to Intercontinental’s need to find a buyer for the asset to satisfy the FTC. We still like the strategic rationale of the acquisition, even after the divestitures, but it adds meaningful execution risk as Intercontinental will need to create significant value to justify the $11.7 billion price tag.