NYSE Buy Seen as Step Toward Global Trading: Archipelago deal creates an entity with the clout to roll up exchanges in the U.S. and abroad

In a deal that promises to transform a primary institution of Western capitalism, the New York Stock Exchange plans to combine with publicly traded electronic market operator Archipelago Holdings Inc. in a $400 million reverse merger that could pave the way for creating a global trading network. The deal would allow the NYSE to become a publicly traded, for-profit company with extensive electronic trading operations. Big Board members, whose interests would be converted to stock, would own 70% of the new entity. In another sign of securities trading consolidation, Nasdaq Stock Market Inc. recently agreed to buy Instinet Group Inc., controlled by Reuters PLC, for $934.5 million. Among the questions raised by the NYSE’s deal are the fate of its 213-year-old floor trading system, dubbed “open-outcry,” the fairness of lockup provisions on stock sales by parties in the new company, and the role of Goldman Sachs in the deal. The end of open outcry? NYSE CEO John Thain says the merger would not end floor trading at the Big Board, but that seems to be an open question on Wall Street, with some experts asserting that the deal is the death knell of the specialist-based open outcry system. “This does signal the end of open outcry. We have evidence from other examples of floor competition that volume would migrate to the automated platform,” says Benn Steil, a senior fellow in international economics at the Council for Foreign Relations. Steil regards the switch to a for-profit structure as an acknowledgement that the NYSE would do better with its finances “in the sunshine than in the shadows” and adds that the new company would be better able to compete with private companies in compensation. This would, presumably, prevent future fiascos like the controversy over former NYSE chairman Richard Grasso’s $140 million pay and retirement benefits package. Some NYSE members, who must approve the deal, are upset that its terms would allow three of the biggest holders of Archipelago – Goldman Sachs Group Inc., General Atlantic Partners, and a company controlled by Archipelago CEO Jerry Putnam – to start selling shares up to two years before NYSE members could. Some NYSE seat owners say these lockups could scuttle the deal. Another deal threat is concern about the role in the transaction played by Goldman Sachs, which is one of the merger’s lead advisers, owns seats on the exchange, and owns 15% of Archipelago. One source, who requested anonymity, says that although onlookers and principals may have questions about the roles Goldman played, “nearly everyone has either worked for Goldman or would like to,” and this tends to limit public objections. Displeasure with Goldman’s role isn’t universal, however. “Thain had to get a deal done. He had to have people he could rely on. If Goldman thought out this process, recognized where it might be going, and made appropriate investments, why should they be penalized?” says Richard Bove, an analyst at Punk Ziegel & Co. Also roiling the waters is the possibility of a rival bid by former Big Board director Kenneth Langone. If the deal is completed, it may well presage a rollup of remaining regional exchanges in the United States. “The Philadelphia Stock Market and other fringe players are clearly on life support. There is an overcapacity of trading systems and many would either be disbanded or absorbed into larger firms,” Steil asserts. He adds that the NYSE deal might be followed up by a bid by one of the two major U.S. exchanges for a “second-tier European exchange.” However, Steve Swanson, CEO of Automated Trading Desk, notes that while transatlantic consolidation could occur, it would be difficult for any of the European exchanges to give up the fee income they receive from processing trades. (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com