Dealmakers warily watched the historic transformation of the New York Stock Exchange last month into a for-profit company in order to determine whether the change will affect mergers and acquisitions. One area it will certainly impact is the ongoing consolidation of securities exchanges, as the Big Board, under the name NYSE Group Inc., morphs into a player from its former role as an impartial referee of corporate life. As a result of its reverse merger with electronic trading platform Archipelago Holdings Inc., the NYSE will immediately become the largest player in its industry. It will have a war chest of between $1 billion and $2 billion to use for acquisitions and other purposes once it completes its stock offering. NYSE chief executive John Thain said late last year that the exchange would be looking at acquisition candidates. It’s expected to try to diversify its offerings as well. “They will be under pressure to sell products that have a higher value added,” said Dick Bove, a financial institutions analyst at Punk Ziegel. Bove said the exchange faces at least two major structural problems: stagnant trading volumes, and the impact of competition from electronic trading platforms that has led to the commoditization of the business. As an example of the increased commoditization of the NYSE business model, Bove says that automated program trading with its lower margins now accounts for 52% of NYSE activity, up from 9% just a few years ago. The exchange recently launched a corporate bond-trading platform. Bonds have been traded on the NYSE for many years, but its new program will seek to involve individual investors as well as the institutional traders that currently make up the bulk of the market. Bove says that in addition to the bond initiative NYSE will try to move into a number of niches in the debt capital markets area, including collateral debt obligations, futures contracts, exchange-traded funds, and other non-equity securities. He notes that the industry is in the midst of a drought because prior periods of low trading activity didn’t have the price-cutting and changes in business models that characterize today’s trading markets. “The action is not in equities but in debt capital and in overseas markets,” Bove says. Domestic targets for the Big Board could include the Philadelphia Stock Exchange, American Stock Exchange, Chicago Board Options Exchange, and Chicago Mercantile Exchange. Thain has not ruled out deals with overseas exchanges as well. The London Stock Exchange has been in a kind of limbo since dissident shareholders at Deutsche Borse blocked the German exchange’s bid for its English counterpart last year. More recently, the London exchange rejected an acquisition proposal by Australia’s Macquarie Bank. There has also been speculation that Deutsche Borse might target a U.S. options exchange, although the German exchange earlier had an unsuccessful fling at that market. Benn Steil, a Senior Fellow and Director of International Economics at the Council on Foreign Relations, discounts the likelihood of any Deutsche Borse bid for the Philadelphia exchange. “Having been burned once before entering the U.S. derivatives market on its own, Deutsche Borse is unlikely to make an acquisition here without a U.S. partner,” he notes. The number of U.S. exchanges that might be on the market could be constrained due to the sale of minority stakes to investment firms, which would make a sale more difficult. Another factor that might shape NYSE’s acquisition plans, Bove states, is that it must adapt to the upswing in economic clout from companies in developing countries, such as Russia, Brazil, India, and China. “The world has changed in the last five years,” he says, pointing to the increased wealth creation that is coming from developing economies. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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