Trader Talk

NYSE-ICE Deal Reflects Diminishing Value of Stock Trading Business

Timothy A. Clary | AFP | Getty Images

The deal is official: Intercontinental Exchange is buying NYSE-Euronext for $33.12 per share; 0.1703 shares of ICE plus $11.27 per share in cash.

It's a story we have seen many times: Tech upstart buys old line firm. Here, a derivatives exchange takes over an old line cash equities business.

Why couldn't the New York Stock Exchange be an acquirer? Diminishing value of an old franchise, even with new acquisitions (Archipelago, the pieces of Euronext) that tried to keep up with the times. NYSE bought Archipelago to keep up with electronic trading, then the pieces of Euronext to keep up with derivatives trading. Still, it's always playing catch-up.

Look at the market cap of the NYSE: $5.8 billion. ICE's market cap is $9.3 billion.We have a low price-to-earnings (P/E) stock in the NYX (about 13) with a higher P/E stock (17) in ICE.

Why does a derivatives company have a higher valuation than an exchange company? Because the growth is in derivatives.

Given the legacy of the business, how do you get to the profit margins of an ICE?

Other factors came into play as well: Low volumes in equities, European regulation, and a poor European economy.

The heart of the deal is in Europe, not the U.S. ICE wants the NYSE's derivative business, LIFFE.

ICE, which is heavily weighted toward energy and agricultural commodities, gets a big derivatives business (LIFFE), a foothold in interest rate futures, and a cash equities business on two continents. Limited overlap makes antitrust concerns a little less obvious.

ICE has little interest in the cash equities business and the NYSE's iconic trading floor. It will likely be spun off. Who will buy it?

They will certainly spin off the European cash equities business. They will likely retain control of the U.S. cash business, including the NYSE floor.

But that doesn't mean some deal couldn't be struck for the U.S. cash equities business separately. Follow the Knight Capital Group deal, where Knight was just acquired by Getco. Logical buyers would be a competing exchange like BATS or Direct Edge, though it would be tough to imagine getting the money. Other buyers include the London Stock Exchange or the Deutsche Boerse. Anyone, other than Nasdaq.

It's entirely possible that the NYSE brand name could be preserved in some type of spin-off, or even an initial public offering, or even that current management might remain in that spin-off.

What fewer players means: This is really a combination, not a consolidation. ICE is not an equities exchange. It is certainly helpful to exchange valuations. Remember, the consolidation wave came to a halt a year ago when a number of high-profile exchange deals (Singapore-Australia, NYSE-NASDAQ-ICE, NYSE-Deutsche Boerse) fell apart among regulatory concerns.

What the world will feel like now: intensified competition. There will be intensified competition between the NYSE and Nasdaq for listings.

What it means for Nasdaq? Opportunity. They will have an angle to argue that the NYSE is a dinosaur, that it is just a matter of time before they go all-electronic. Nasdaq just acquired Thomson's Issuer Services Platform, which provides press releases and investor relations tools to companies. Almost every Investor Relations officer in the country uses that service. Lots of NYSE listed companies use that platform.

The impact on individual investors: If you are an NYX shareholder, you definitely feel better with a $33 offer. The NASDAQ-ICE bid for the NYSE was $42.53, a year and a half ago.