End Of An Era: ICE To Acquire NYSE Euronext

It’s finally happened. NYSE Euronext (NYSE:NYX) confirmed yesterday on its website that the company had reached an agreement with IntercontinentalExchange Inc. (ICE) for the sale of the market operator. Under the terms of the agreement, ICE would acquire NYSE Euronext for approximately $8.2 billion or $33.12 per share via a cash-plus-stock compensation. NYSE’s shareholders will have the option to either receive $33.12 in cash, 0.2581 share of ICE or a mix of $11.27 in cash plus 0.1703 ICE share. The price is at a premium of nearly 35% to our estimate of $25 per share.

The deal is expected to close in the second half of 2013, subject to regulatory approval from European and U.S. authorities. We will update our coverage once the deal is complete.

See our full analysis of the NYSE Euronext stock here

We believe that ICE has its eyes on NYSE’s European derivative business, NYSE Liffe. ICE had made a hostile bid for NYSE along with Nasdaq (NASDAQ:NDAQ) in April last year, after NYSE had announced plans of a possible merger with Deutsche Boerse AG. This deal involved Nasdaq taking over NYSE’s stock exchanges with ICE getting the derivatives business but was blocked out by the U.S. Justice Department as it would give Nasdaq a monopoly over listings in the country. Please read our article Why Does ICE Want To Takeover NYSE? For a detailed analysis of what ICE might want with NYSE’s businesses.

This was not the only inter-exchange deal that was stopped by authorities, according to Bloomberg data, more than $32 billion in exchange takeovers have been halted since October 2010. ^[1] These include ICE’s bid for London Metal Exchange, earlier this year. The NYSE – Deutsche Boerse merger was also blocked by European regulators as the two hold a near duopoly over the European derivatives market and a merger would mean that one company would dominate the entire market.

We believe that NYSE-ICE deal might have a better chance of going through since there is very little overlap between ICE’s and NYSE’s businesses. The former is an energy and commodities exchange, operating primarily in the U.S., whereas operates equity and derivatives exchanges in the U.S. and Europe.

What Will Happen To New York Stock Exchange?

Established more than 200 years ago, the New York Stock Exchange is one of the cornerstones of Wall Street. Although traders have using the NYSE floor for trading for more than a century, it has been diminishing in importance. Since Nasdaq opened the world’s first electronic exchange in 1971, NYSE has been losing market share. The exchange’s market share in equity trading has dropped from above 80% to just over 20% in the last decade.

BATS (Better Alternate Trading System) started operations in 2005 and now operates two exchanges, the BATS BZX Exchange and BATS BYX Exchange, which account for more than 12% of the cash products trading volume in the U.S. ^[2]

Another factor contributing to the decline in equity volumes is increased off-exchange trading. The Trade Reporting Facility (TRF) has reported that the share of off-exchange trading has increased from 28% of all trades in the U.S. last year to 32% at the end of September.

Given these factors, it is hard to ignore the rumors in the market that ICE might divest NYSE’s trading and listing business or even go as far ahead to shut down the floor for trading. ^[3]

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1. IntercontinentalExchange to Acquire NYSE for $8.2 Billion, 20^th December, 2012 [↩]
2. Market Volume Summary, BATS Trading [↩]
3. ICE to buy NYSE Euronext for $8.2 billion, Reuters, 20^th December, 2012 [↩]