NYSE Could Change Radically
With the release this week of an independent financial review, the New York Stock Exchange cleared its last major hurdle before a Dec. 6 vote on an historic plan to modernize the 213-year-old trading floor and transform itself into a public company.
The proposal, announced in April, calls for the NYSE to buy electronic trading company Archipelago Holdings Inc. for $6 billion. The deal is seen as the technological key for the storied Wall Street institution to remain relevant in a world of automated markets.
“Dec. 6 will be marked as the most important day for the New York Stock Exchange in the last 100 years,” said Jay Peake, a finance professor at the University of Northern Colorado.
If executed properly, the Archipelago acquisition could stoke growth by helping the NYSE trade fast-growing financial instruments such as options and exchange-traded mutual funds, experts say.
“Our business model needed to be radically changed to compete in the new global environment,” said Jim Rutledge, a NYSE seat holder since 1973. “By embracing Archipelago into our family, it will return us to being the preeminent marketplace in the world.”
At the same time, the deal threatens the future of the NYSE’s floor-based trading system in which swarms of brokers and specialists gather face to face to swap shares. These traders have long been the linchpin of the market, smoothing out price swings in stormy markets and stepping in to take the other side of trades when there aren’t buyers or sellers for thinly traded stocks.
The consensus on Wall Street, however, is that the NYSE must evolve.
“At the end of the day, the owners of the exchange recognize that it is something they need to do,” said George Rodriguez, a former NYSE staffer who is now a managing director at TradeTrek Securities, an institutional brokerage in Newark, N.J.
Most of the debate surrounding the marriage hasn’t been over whether it should take place, but over the dowry.
A group of dissident NYSE seat holders led by William Higgins filed suit to block the deal, saying their ownership stake in the exchange was undervalued. The deal calls for the 1,366 NYSE seat holders to get 70% of the new company, and Archipelago shareholders the remaining 30%. Seat holders would also get $300,000 each, plus an additional amount of as much as $75,000.
Shares in the new company would be publicly traded.
The dissidents contend that NYSE seat holders could have gotten more, saying the exchange has an internationally known brand name and a dominant role in the stock trading of America’s biggest companies. They claimed that the valuation was low in part because of alleged conflicts of interest by Wall Street investment bank Goldman Sachs Group Inc.
In a highly unusual arrangement, Goldman advised both the NYSE and Archipelago. Banks normally represent only one side of a deal. Goldman also has a financial involvement because it owns a large floor brokerage and is a major investor in Archipelago.
“They’re shortchanging the seat holders,” seat holder Charles Urstadt said in an interview. “It’s an imbalanced deal.”
A Goldman spokesman said that the company’s role was proper and that it didn’t determine valuation or the ownership split. “We had no role in negotiating the terms of the deal,” spokesman Ed Canaday said.
The NYSE and the dissidents reached a settlement Nov. 15, in which the NYSE agreed to an independent financial review of the acquisition.
Citigroup Inc., which conducted that analysis, released an opinion late Wednesday that the deal was “fair, from a financial point of view,” to NYSE seat holders.
That clears the way for seat holders to vote on the acquisition Dec. 6. The deal requires approval by two-thirds of seat holders and the Securities and Exchange Commission.
Whatever the outcome, NYSE seat holders and Archipelago investors have already reaped gains.
Since April 19, the day before the deal was announced, Archipelago’s share price has soared 246%, to $58.50 as of Wednesday.
And the value of an NYSE seat has more than doubled. A seat sold Tuesday for $3.5 million, compared with $1.6 million before the announcement. Beyond that, the so-called implied value of an NYSE seat, which is a calculation based on Archipelago’s stock price, now tops $5 million.
“It’s more than a fair deal for seat holders,” said Peake, the finance professor from Colorado.
