As the company behind the prestigious New York Stock Exchange, NYSE Euronext (NYX +0.00%) makes money when people trade any stock. Yet for its own part, NYSE Euronext stock has soared in anticipation of its pending $8.2 billion acquisition by rival IntercontinentalExchange (ICE 1.07%). With European regulators having approved the deal earlier this week, the transaction appears to be on track to close during the second half of the year, although the SEC and other regulators have yet to weigh in. Let's take a closer look at the exchange industry and what shareholders in NYSE Euronext can expect going forward.
Understanding the ICE deal
If you own NYSE Euronext stock, the ICE buyout gives you choices about what you'll receive in exchange for your shares. With the transaction valued at $33.12 per share at the time of the offer in late December, shareholders will have the election of receiving cash or ICE shares, with 25.81 shares of ICE stock for every 100 shares of NYSE Euronext stock you own. The election is subject to maximum cash and stock requirements that ICE set, with an overall mix of two-thirds stock and one-third cash. Due largely to the fact that ICE shares have posted strong gains, the stock price for NYSE Euronext has climbed well above the $33.12 level.
Shareholders already approved the deal earlier this month, so what shareholders are waiting for are customary approvals from regulators looking at potential anti-competitive effects and other financial considerations. Given the big role that exchanges play in the financial markets, regulatory examinations are especially important, but so far, the companies haven't seen any roadblocks to their merger.
The crown jewel of the trading world
One of the biggest concerns about the NYSE Euronext takeover is preserving the long history of the New York Stock Exchange. Even though technology has greatly transformed how stocks actually trade, the culture of the NYSE still stands as a testament to the importance of live human beings in conducting trading and making markets. ICE has committed to preserving the NYSE brand, maintaining a corporate presence in the same building that houses the NYSE trading floor.
Yet the importance of the NYSE has fallen in recent decades, as rival exchanges have risen up to compete not just in the U.S. but globally as well. Rival Nasdaq OMX (NDAQ 0.57%) represents the obvious competitive threat in U.S. stocks, with recent moves like opening up shorter ticker symbols to Nasdaq-traded companies helping the exchange close a gap with the NYSE. Yet so-called dark pools have taken away a considerable amount of volume from the major exchanges as well, as computer-driven traders seek advantages from other trading venues.
Among exchanges, the action is beyond the stock market. With the rise in trading of futures, options, and other derivative investments, NYSE Euronext's ownership of the NYSE Liffe exchange in London was a key element of ICE's interest. CME Group (CME +2.21%) and CBOE Holdings (CBOE +2.31%) have worked hard to preserve their respective strength in futures and options, and rising market turbulence has made many of their products look a lot more enticing. Given that derivatives can help hedge market risk and reduce overall exposure, all of the exchange companies have an opportunity to bolster their presence in the derivatives market with innovative products that meet the new needs investors have in a more turbulent financial environment.
Cashing out or cashing in?
For holders of NYSE Euronext stock, the big question is whether to take the money and run, or hold onto shares of ICE. Given the huge value of the NYSE brand, ICE should benefit greatly from an enhanced reputation and greater competitive presence in the exchange industry for years to come. Still, many investors wary about the rise of high-frequency trading and possible tougher regulation in the long run might well prefer to take the opportunity to exit, especially given how Nasdaq OMX, CBOE Holdings, and CME Group will all give ICE a run for its money going forward.
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