Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Previewing 2007: NYSE Group

The Big Board transformed itself in 2006. After 213 years as a private club, it became a public company, the NYSE Group (NYSE: NYX  ) . It completed the acquisition of Archipelago, and started to roll out the new Hybrid trading system. Yet the most daring move is the proposed merger with Euronext, a major step in NYSE's goal of "transforming the markets," as its chief financial officer, Nelson Chai, said in a recent investor presentation. Investors, recognizing the value of the NYSE franchise, the opportunities created by Grasso-era neglect, and the skills of John Thain and his team, drove the stock up 96% in 2006. (See "2006 in Review: NYSE Group.")

For 2007, NYSE is in a good position to improve its operating and financial results dramatically.

In 2006, Thain and his team implemented their Euronext merger strategy astutely, and with political finesse -- in contrast to the more warrior-like approach of Nasdaq (Nasdaq: NDAQ  ) to the London Stock Exchange. The focus for 2007 is on the execution of the Euronext merger.

As French political and financial opposition evaporates, and the fear of a U.S. regulatory spillover dissolves, the Euronext merger looks near-certain. The revised 802-page prospectus for the merger, issued in November, is clear on the main source of value from the merger. Of the projected annualized cost savings of $275 million, $250 million comes from consolidating technology systems, projected to be realized over three years -- $30 million in 2007, $100 million in 2008, and $250 million in 2009.

The NYSE Euronext group will start life with three cash trading platforms, including Hybrid and NYSE Arca, and three derivative platforms. The plan is to move to one cash system and one derivative system. The most likely candidate for the single cash platform is NSC -- so the new Hybrid system may have a very short life. The NSC system, developed by Euronext, is a battle-tested system at the heart of several major U.S. exchanges. It is licensed to the Chicago Mercantile Exchange (NYSE: CME  ) , and is part of the CME Globex platform, which is, in turn, used by the Chicago Board of Trade (NYSE: BOT  ) and Nymex Holdings (NYSE: NMX  ) to process their trades.

Projected savings from the merger also include $25 million a year for non-IT cost savings. Additional revenue synergies of $100 million are projected, with expected realization within three years of the combination.

Now, on to valuation. Given the zoom in exchange stocks this year, valuing NYSE relative to other exchange stocks requires caution -- they are all very high. NYSE trades at a forward P/E of 44, Nymex Holdings has the same ratio, and the CME has a forward ratio of 36. Relative to its sector, NYSE represents the best value for two reasons. First, it has the greatest scope for improvement -- current operating margins of 30% are less than half those of Nymex and CME. Second, NYSE, with its proposed Euronext merger, has the most ambitious and highest-return strategy. Orchestrating the first-ever transatlantic exchange is much higher-risk than knocking exchanges together in Chicago. But NYSE now has a track record with the successful Archipelago integration -- or, as some argue, the other way around -- and can call on Euronext's proven expertise in cross-border mergers.

NYSE is aMotley Fool Rule Breakersrecommendation. For more high-growth stock picks, you can check out a30-day trialof the newsletter absolutely free.

Fool contributorJohn Finneranwrites and advises on increasing the financial value of technology. He is currently ranked 47 out of 17,758 inCAPSand does not own any of the shares mentioned. The Fool'sdisclosure policywill trade you its peanut butter sandwich for your Twinkie.

Read/Post Comments (0) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 519188, ~/Articles/ArticleHandler.aspx, 10/25/2016 9:54:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,212.14 -10.89 -0.06%
S&P 500 2,148.89 -2.44 -0.11%
NASD 5,306.12 -3.71 -0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
NYX.DL $0.00 Down +0.00 +0.00%
NYSE Euronext CAPS Rating: *****
NDAQ $66.37 Up +0.07 +0.11%
Nasdaq CAPS Rating: ****