Betfair and Paddy, a Power Combination

A few years ago I discovered a service called Transferwise. It matches up two sides of a foreign exchange transaction, so say you want to exchange Pounds for Dollars, it matches you up with someone, or a few people, who want Pounds and have Dollars. Instead of paying bank large commissions on the currency exchange, they take a small cut for making the match.

This isn’t an ad for Transferwise, but the point is, matching people who want to make a trade enables cheap commerce and increases the standard of living. Establishments can either be large clearing houses, taking all offers against themselves, or they can simply match people and not take on any financial risks directly. We are seeing this in the monetary sphere with Bitcoin and Bitgold, where two parties can exchange directly without a bank. We are seeing it in Forex with Transferwise. And we are seeing it in betting with exchanges.

What is a bookmaker if not a bank for punters? That is what it is. But since Betfair came along, quite aptly named, betting banks no longer have a monopoly on the industry, just like when Transferwise came along, banks proper lost their monopoly on currency exchange.

Last week I covered the top three defensive gaming stocks. It included Paddy Power as #2. I had no idea that only one day after that article was published, Paddy Power would confirm a merger agreement in principle with Betfair, and Paddy would rise 24%. Betfair is also up about 23% on the news. The fact that both companies have skyrocketed on the news of a potential merger is evidence that it really is a synergistic move if it does indeed go through. Usually with these types of mergers involving two public companies, the more highly leveraged company loses value and the smaller one that is being acquired gains in a sort of equity balancing act. In this case, both gained, thanks partly to the fact that neither is leveraged at all, indicating that the whole is greater than the sum of its parts.

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The Daily Payoff
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