We already know what the market thought of the proposed merger of the New York Stock Exchange with the electronic stock exchange gurus at Archipelago Holdings (NYSE:AX). Shares of Archipelago shot up to nearly $30 yesterday. That's great news for our Rule Breakers subscribers, who were drawn to the company when it was recommended at just $20.42 in the February issue.
But assuming the deal goes through, what exactly is this new entity worth? The market -- to some the only voice that truly matters -- has already chimed in. Archipelago closed out the March quarter with 47.8 million shares and will receive 30% of the new company. Given those figures, the proposed NYSE Group will have roughly 160 million shares outstanding. With the stock at about $30, we're looking at a $4.8 billion company.
Even though NYSE is privately held, you can find, in the spirit of open disclosure, its 2004 annual report online. Let's go over the balance sheet first. Archipelago started off the month with $193.2 million in cash. Doesn't the deal involve the 1,366 NYSE owners being paid $400 million in addition to receiving a 70% stake in the new company? Yes, but it won't rough up the balance sheet here.
NYSE closed out the year with nearly $1.1 billion in current assets, mostly in the form of investment securities, that were readily convertible to cash. The company also had a good chunk of liabilities ($389 million in current liabilities and another $311 million in accrued employee benefits), but the company should be able to resolve the $400 million distribution without tapping into Archipelago's coffers. In short, the new company will still have a nice-looking balance sheet.
Then we combine the income statements. Last year, NYSE reported $1.4 million in revenue. However, that includes $359.8 million in activity assessment fees -- which the exchange turns right around and pays over to the Securities and Exchange Commission. So while revenues do, in fact, come in at $1.4 million, the fairer top-line figure is the $1.1 million that is left over. On that, the company earned $26.4 million.
Archipelago had a solid 2004. Last year, it reported $59.3 million in earnings on $541.3 million in revenues. Combine NYSE's adjusted financials with Archipelago's and we get $85.7 million in profits -- or $0.54 a share in earnings on the proposed 160 million shares outstanding -- on $1.6 billion in revenue.
That adds up to a combined company, assuming the deal goes through without a hitch, selling right now at three times last year's revenue and at 55 times last year's earnings. That may not seem so cheap. Nasdaq (NASDAQ:NDAQ) and Instinet (NASDAQ:INGP) each trade at just 1.6 times trailing revenues, while Knight Trading (NASDAQ:NITE) fetches a top-line multiple of just 1.8. The P/E of 55 may also seem a bit steep, unless one makes the rightful assumption that some serious operating efficiencies will need to be squared away with the combined company, and that will produce higher profit margins (and earnings) than NYSE had been generating in the past. So, no, the shares aren't exactly cheap right now, but they may not be as overvalued as it would appear after a cursory glance.
NYSE Group will be under the analytical spotlight until the deal closes, either by the end of the year or early in 2006. Our Rule Breakers subscribers are already doing exactly that kind of analysis right now, in the active discussion boards that are part of the newsletter service. You can come and join them, free, with a 30-day trial subscription. Yet no matter where you watch this situation develop, do watch it. If the deal ultimately goes through, NYSE Group will be a very significant public company for investors.
- This is how it all went down between the two companies this week.
- Check out the other stocks making the cut in the latest Rule Breakers issue.
Longtime Fool contributor Rick Munarriz thinks it's neat that while all the speculation centered on Instinet and Nasdaq pairing up, Archipelago and NYSE had been in secret talks since January. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
