World's biggest stock exchange goes public
The NYSE ends 213 years as a member-owned exchange on Tuesday when it seals its purchase of electronic rival Archipelago Holdings.india Updated: Mar 06, 2006 04:38 IST
Founded by some traders under a tree on Wall Street two centuries ago, the world's biggest stock exchange enters a new growth phase this week as it goes public, building a war chest to expand globally and add assets.
The New York Stock Exchange ends 213 years as a member-owned exchange on Tuesday when it seals its purchase of electronic rival Archipelago Holdings and sets up the NYSE Group Inc, which starts trading on Wednesday.
Adding stock options, fixed income products and more over-the-counter trading to its menu, the NYSE will pit itself in the United States against the younger, more nimble Nasdaq Stock Market Inc., the world's second largest exchange.
But with the NYSE planning a share sale within weeks of going public, analysts also expect the new company to be quick off the mark to join the ongoing consolidation among bourses in Europe and even in Asia.
"I think the NYSE chose this route to go public, merging with Archipelago, to give it the currency to be able to act more quickly in this consolidation," said Richard Herr, an analyst with Keefe, Bruyette & Woods.
"So far the NYSE has given no formal guidance on its plans but after Wednesday we will want to see what its strategy will be going forward in this growing, competitive market."
When the NYSE Group starts trading on Wednesday analysts expect the stock price to pick up from Archipelago's close on Tuesday, with the deal already factored into the price.
Technology has transformed financial trading, with a new breed of online traders allowing buyers and sellers to pair up in a fraction of a second. A race to offer the fastest, cheapest trading system set off a bull market in exchanges.
The NYSE has been slower than other exchanges to go public as it first had to do deal with a few internal problems.
In 2003 NYSE Chairman Richard Grasso was forced out in a pay dispute.
The NYSE also has had to handle charges that some traders had failed to act in investors' best interests.
Last year, however, under new Chief Executive John Thain, the NYSE announced that it would now follow other exchanges and go public.
The NYSE declined to comment other than to refer to previous statements released by the exchange.
Building a war chest
The not-for-profit NYSE opted to go public, not through an initial public offering but by giving its 1,366 owners, or seat holders, $300,000 each in cash and 80,177 shares in a new company of which NYSE shareholders own 70 percent. NYSE Group will have a market value of over $10 billion.
Some of the shares given to NYSE seat holders and staff will be put up for sale within weeks, but the NYSE has not given any clues on a primary share sale. Analysts speculate this sale could raise up to $2 billion.
"This offering and anything that happens going forward is to build up a war chest as they work out how to compete on an international basis," said Sang Lee, managing partner of Aite Group, a financial research and advisory firm.
Analysts expect the stock sale to be well received, mirroring other offerings since exchanges worldwide began to move away from being member-owned clubs and go public.
Shares of Deutsche Borse AG, which led this trend in 2001, have continued to do well, rising 94 per cent last year as one of Europe's best-performing stocks.
In the United States, shares of the Chicago Mercantile Exchange have climbed more than 12-fold to $434 each since it went public at $35 in 2002. They rose 61 per cent in 2005.
NYSE is going public at a time when US exchanges are trading at a premium to their European peers, sparked by a busy 12 months as the US market catches up with European changes.
Herr said European exchanges are trading at about 18 to 20 times forward earnings, compared with 30 to 40 times for US exchanges.
"But it is difficult because there is so much sea change going on with the equity markets and NYSE and Nasdaq that it is hard to accurately say what they will earn," said Herr.
But Lee said, the NYSE has one advantage over any rivals when it comes to attracting new company listings -- its size and reputation. It's hard to put a value that.
Technology fast track
Thain has made it clear that the NYSE wants to add new products on top of its equities business to bolster growth.
But Larry Tabb of the financial markets research firm Tabb Group said expanding the NYSE's bond trading capability, for example, could be an uphill battle given how many other banks and brokerages in recent years have tried similar systems and failed.
"Back in the Internet heyday there must have been 20 companies that tried to develop electronic bond trading systems and only one succeeded," said Tabb.
But Thain has also made clear his ambitions to expand abroad, expressing interest in Europe where the three main exchanges -- the London Stock Exchange, the Deutsche Borse, and Euronext (a merger of the Paris, Amsterdam, Brussels and Lisbon exchanges) -- have been locked in on-off mergers.
This could help the NYSE capture the business it loses before the US market opens in the mornings as well as attract listings that are not eligible for US exchanges.
"But although Thain is talking about overseas expansion, they really need to focus on the US domestic market where there is enough competition and there is going to be a lot of work around integration," said Lee.