) announced its intention to buy the largest stock exchange based
on listings -
NYSE Euronext Inc.
) for $8.2 billion. The deal is expected to culminate by the
first half of 2012, subject to the fulfillment of regulatory
compliances in the U.S. and Europe.
Accordingly, the $8.2 billion deal is based on $33.12 per NYSE
share, which represents a 37.7% premium on NYSE's closing price
on Dec. 19. Meanwhile, IntercontinentalExchange plans to fund the
transaction by letting out 67% in shares and 33% in cash, which
will be raised through cash and credit facilities.
Moreover, the investors at NYSE have the option of taking cash
payment of $33.12 a share or receive 0.2581 shares of
IntercontinentalExchange for each NYSE share. A third option
includes a mix of $11.27 in cash along with 0.1703
IntercontinentalExchange shares per NYSE share, although this
funding is restricted to a maximum cash outlay of $2.7 billion
and a maximum stock outlay of 42.5 million shares of
Post acquisition, the 220-year old NYSE will own 36% in the
12-year old IntercontinentalExchange, while four members of the
former will share the latter's board. Meanwhile,
IntercontinentalExchange is seeking the advice of
) along with
JPMorgan Chase & Co.
), BMO Capital Markets Corp, Broadhaven Capital Partners, Lazard
Group LLC, Societe Generale Corporate & Investment Banking,
and Wells Fargo Securities LLC of
Wells Fargo & Co.
). NYSE, on its part, has appointed Perella Weinberg Partners,
BNP Paribas, Blackstone Advisory Partners,
Goldman Sachs Group Inc.
) and Moelis & Co.
Why the merger makes sense?
NYSE has had a history that elucidates its journey boom to
bang. NYSE has been the largest exchange vis-à-vis value of
listing within the U.S., France and Netherlands. However, the
growth of the company was put under stress with heightened
competition, regulatory challenges and the ongoing market
volatility amid the low interest rate environment over the few
years. These factors have significantly hit the company's trading
volumes and margins, shrinking its global market share from 82%
to 21% currently. A merger at this point could help NYSE leverage
its efficiencies and global presence productively, thereby
positioning it well to tap growth opportunities once the global
economy recoups stability.
Gaining edge through the merger
The NYSE-IntercontinentalExchange merger is expected to be a
solid business combination. The alignment of derivative
operations and clearing services acts as a strategic fit for both
the companies. Alongside, the merger is expected to generate more
than 15% of earnings accretion within the first year of
completion of the deal. Going ahead, management projects run-rate
expenses synergies of about $450 million, which will be reaped in
the second year of the merger startup. NYSE itself has generated
$82 million in cost savings so far in 2012 from its expense
management plan that should produce cost synergies worth $250
million, 33% of which is projected to be earned by the end of
Additionally, the merger will bring forth a strong competitive
advantage by creating an end-to-end multi-asset portfolio and
diversifying across the globe, while also vigorously tapping new
opportunities in the emerging economies. Further, NYSE Liffe's
both trading and clearing operations will be merged into ICE
Clear Europe. This will create an excellent clearing model that
is expected to grow by leaps once the interest rate volatility
dissipates and interest rate swap clearing develops. The
operational and capital efficiencies attained in both the U.S.
and Europe will make the merged entity a dominant global player
and well-position it to take away the market share from leading
CME Group Inc.
Hence, the merger is backed by a strong operating and
competitive leverage, which will help the merged parties to
generate enhanced operating cash flow, trading volumes and
expense control. These factors will further aid
IntercontinentalExchange to initiate annual dividends of about
$300 million, which is impressive given the current volatility,
thereby amplifying the shareholders' value.
Watchful on Second Attempt
However, this is not the first time that NYSE is up for a
merger. In February this year, NYSE was compelled to terminate
its $10 billion merger with Frankfurt-based Deutsche Boerse due
to the rejection from the regulators based on anti-trust concerns
that were anticipated to create unhealthy competition. For
similar regulatory, political and commercial hurdles, the
take-over bid of $11.3 billion, initiated together by
NASDAQ OMX Group Inc.
), got scrapped last year. At that time, IntercontinentalExchange
was expected to take over NYSE's European futures markets (Liffe,
Liffe U.S.) and the over-the-counter clearing business
Hence, we remain on the edge to see further regulatory and
other developments regarding the merger, as a slight plausibility
of the merger being scrapped based on the anti-trust and
regulatory concerns remains apparent.
IntercontinentalExchange carries a Zacks #3 Rank, which
implies a Hold rating in the short term, while the long-term
recommendation remains Neutral. However, NYSE holds a Zacks
#4 Rank, which translates into a short-term Sell rating, which
the long-term recommendation remains Underperform.
CITIGROUP INC (C): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis
GOLDMAN SACHS (GS): Free Stock Analysis
INTERCONTINENTL (ICE): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
NASDAQ OMX GRP (NDAQ): Free Stock Analysis
NYSE EURONEXT (NYX): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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