Nasdaq (Nasdaq: NDAQ ) wants to build its traded options business. A bid for the Philadelphia Stock Exchange, the country's third-largest options exchange by contracts traded, is rumored. But options come in two flavors. Best known are traded financial options. Less known, but more important, are real strategic options, including information technology projects and new ventures. Nasdaq's real options are worth more to investors than any takeover rumors.
Yesterday's results showed Nasdaq's U.S. strategy is working. Net income before exceptional charges was $41.8 million, or $0.29 per share, up from $26.2 million, or $0.22 per share, a year earlier. Pursuit of the London Stock Exchange (LSE) knocked net income down to $18.3 million, or $0.14 per share. Chief culprits included $24.9 million in legal and banking fees and a $7.8 million loss on a foreign currency option, bought to hedge the currency exposure for the LSE bid.
Though the LSE bid depressed results this quarter, it provides a valuable financial and real option. Nasdaq now owns a controlling stake in LSE, providing several advantages. First, Nasdaq has an unrealized gain of $176 million on its stake worth more than $1.5 billion. Second, Nasdaq owns 29.6% of the LSE, which it can use to make life difficult for other bidders -- especially the NYSE Group (NYSE: NYX ) -- and which provides the option of another takeover approach, once British regulations allow it.
Nasdaq's most important real options come from its trading technologies. All equity trading is done through a single, hyper-fast, all-electronic platform. In contrast, many of the trading platforms behind the better-performing exchange stocks, such as NYSE and Chicago Mercantile Exchange (NYSE: CME ) , are still on the road to all-electronic trading. Nasdaq is already working on modifying its INET trading system to support options trading -- a much cheaper option than acquiring the Philadelphia Exchange.
Another interesting real option for investors is Nasdaq's Portal system, which allows centralized trading of private securities for the first time.
Investors need to think about all of Nasdaq's options -- traded and real -- when valuing the stock.
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