How Langone can make AX/NYSE deal 26/74 instead of 30/70

How much more of the NYSE Group do Langone and his nay-saying pals think is reasonable? Would an extra 4% satisfy them. Considering that the value of their NYSE seats has sky-rocketed since the merger was announced on 4/20 it's gonna be tricky for Langone to convince anyone that the merger is a bad idea.

If Langone has $200mm available to thwart an AX/NYSE merger, he could unilaterally go out and by that many dollars worth of Arca stock. Assuming he could buy AX for $32/share he'd get about 6,250,000 shares, or ~13% of AX's market cap for $200mm (at $32/share and 47.14 million shares outstanding, AX's market cap is ~$1.5 billion).

13% of 30% (of The NYSE Group that belongs to AX shareholders) is ~4%. This would essentially turn the deals terms to 26% of the NYSE Group for AX shareholders and 74% of the NYSE Group for NYSE shareholders.

Sun Micro/ArcaEx deal and NYSE accretion

In early February, Sun Microsystems inked a deal with Arca. This deal created the world's first platform to buy and sell blocks of computing power at market prices. The Financial Times said the new exchange would be operational in three to five months from the time the aforementioned article was published. That means by August, this futuristic, high-margin line of business should be chugging along. The Financial Times also reported that a speculative market for computing power futures likely would emerge once the exchange was established.

There really wasn't much buzz about it, but as the article in the link above states, some analysts see the market for auctioning computer power exceeding $4 billion. The dinosaurs who rule the NYSE have no clue what this market is about, but won't need to with this merger. This type of intrinsic value that NYSE shareholders get out of this deal will only baffle folks like the non-sophisticated, Langone team.

The earnings that this deal with Sun produce will be accretive to the earnings of the NYSE. It also gives NYSE shareholders entry into a new, high-margin, growing market.

Shades of Yahoo and Google

In some ways the AX/NYSE v NDAQ/INGP duopoly is similar to the YHOO v GOOG duopoloy. YHOO has numerous streams of revenue while GOOG has only one. AX/NYSE has numerous streams of revenue with this merger (i.e., computing power, traditional exchange revenue, options, and other derivitiaves). NDAQ/INGP has one revenue stream (it's multiple streams, but one category -- "traditional exchange revenue.").

John Jakobson, seat holder, on CNBC

At 11:06 AM EST this morning, CNBC's Bob Pisani interviewed John Jakobson, a NYSE seat (read: share) holder. Mr. Jakobson said that he didn't feel the 30/70 deal was a sticking point -- he said, "of course we'd like more, but I don't see that part of the deal changing."

He went on to say Goldman Sachs is the "preeminent investment bank. . .they can do this [the AX/NYSE deal] better than anyone else."

Seems like the counter-bid hype is starting to wane.

Background: William Donaldson, Chairman of the SEC

The quarterback for Regulation NMS, William Donaldson is a pioneer in creating an atmosphere for US equity markets to evolve. His experience includes serving as CEO and chairman of the NYSE.

To be sure, he has plenty of relationships with NYSE shareholders (i.e., seat holders) and other titans of Wall Street. After more than a year, Donaldson and his team persuaded these folks to see modernizing the current US equity markets as critical. The NYSE and Arca were way out in front of these new regulations, and their plan to merge is fertilized by the egg the SEC laid on April 6, 2004.

And as far as the time table goes, the NYSE has set the date of April 10, 2006 for testing of their new Hybrid system to commence. The sooner the ArcaEx integration can begin, the more likely Thain is to meet this time frame.

Crains Chicago sees Arca as a catalyst

Crains Chicago has a story about the AX/NYSE deal and its impact on the various burses in Chi-town.

The report makes it sound like futures trading on ArcaEx is around the corner.

Background: Stanley Druckenmiller

Langone roped in hedge fund operator Stanley Druckenmiller to try to thwart the AX/NYSE deal. Does the world really want a gambler to own the NYSE?

Background: Kenneth Langone

Langone is not liked in NYSE circles. In addition to chairing the compensation committee that juiced Grasso a ridiculous $190mm salary, he took the side of Grasso and opposed executives at Goldman Sachs and the NYS Attorney General, Eliott Spitzer.

In fact, Spitzer said in February, "Ken Langone has been charged [in matters related to Grasso's pay] because he and Mr. Grasso turned the New York Stock Exchange into the piggy bank for Mr. Grasso."

Spitzer is among the regulators needed to enable the AX/NYSE merger to go through. The deal and its structure were incredibly well concieved by some of the brightest investment bankers in the World -- literally. Things that the bankers take into consideration have to do with future cash flow (to apply, a basic valuation metric - "discounted cash flow"). When one considers the economies-of-scale that will be realized by the AX/NYSE deal, and subsequent margin expansion, it's fairly easy to argue that not only is the 30/70 deal fair, but it's a pretty good deal for the NYSE (read: it's seat holders/current shareholders).

Without ArcaEx the NYSE will not be able to compete in a digital, stock market world. The cost of entry into this space is vast and due to Arca-owned patents, somewhat prohibitive. It's natural for buyers to experience "buyers remorse" (just checkout this agenda for a seminar on negotiating, with an emphasis on minimizing this remorse and achieving win-win outcomes).

When someone sells a house it's not unusual for the seller to wonder if he could've gotten more for it, and the buyer to wonder if he could've talked the seller down more. The AX/NYSE merger is far from a real-estate transaction, but the principles that govern human behavior during "expensive" negotiations is not much different. Langone, et al wonder if they could get more -- that's natural. To folks in the know, like Seth Merrin, Liquidnet's CEO, Arca is the future of the NYSE. They're getting a deal at 30% for their ticket to the digital equity exchange of the future. For NYSE to survive, they must get digital. Thain and Putnam should be recognized for their vision and leadership.

Langone plan not likely

The AP reported today that Langone has $200 million with which to buy up as many seats as possible to force changes to the AX merger. Given that a seat sold today fo r$2.4 million, Langone would get a whopping eight seats. The NYSE needs a two-thirds majority vote among seat holders for the merger to go through. Considering that there are a total of 1366 seats his 8 or so seats won't make a difference. Also, Goldman Sachs owns an undisclosed number of seats that would hedge any attempt at thwarting a NYSE/AX deal.

A look at the various stakeholders

Arca bid up!

Home Depot co-founder turned financier, Kenneth Langone, is attempting to launch a rival bid to buy the New York Stock Exchange and Archipelago according to a report in today's Wall Street Journal. You can read about it here: http://tinyurl.com/cgxjh

What does this mean for Arca?
Mr. Langone, according to the WSJ report, has asked numerous Wall Street chief executives, if they would be down with a counterbid for Archipelago and the NYSE.

Some of the CEOs that had a colloquy with Langone told the Journal that Langone is pissed-off about two things:
- The deal is undervalued; and
- That Goldman Sachs is serving as an adviser to both Archipelago and the NYSE in the merger.

The article goes on to say that once Langone gets enough support, it will be critical for him to bid on Archipelago in order to break up the deal proposed on 4/20. This begs the question:

What does this mean for Arca shareholders?
If Langone thinks the deal is undervalued, that means the value of AX is undervalued. Bidding battles tend to be favorable for sellers -- in this case Arca. To be sure, the value of what Putnam and his team have created is what is being bid on -- not the value of an open out-cry floor-based system.

Supporting this notion is the CNN article (see link above), statement:
" Financier Kenneth Langone is mounting a rival bid to buy electronic trading platform Archipelago Holdings"

Putnam is the man!

Hat's off to Jerry Putnam for making the biggest deal on Wall St. in ages happen. His vision is largely behind the evolving structure of the global equity markets.

A disruptive technology start-up exchange approached the most legandary institution on Wall Street about merging their enterprises. Regulation NMS's impact on the NYSE has been absorbed and leveraged by ArcaEx -- Putnam played where the puck was headed (scroll to "Griswold fears obsolescence")and he scored big time for his team! Read about Putnam's genious here:
http://tinyurl.com/7efuu

Latest downgrades laughable!

Harken back to 11/04 (scroll down to 11/19 here: http://tinyurl.com/3v6ac) when Jefferies' clown Chamberlain opened her mouth then and the stock was at $18.66. Two months later, the stock was at $20.99.

To be sure, Chamberlain has historically been a contrarian indicator. Check out her pathetic track record covering technological financial services here: http://www.knighttradinggroup.us/char.shtml

ArcaEx's advanced technology

ArcaEx uses incredibly robust sunw systems. Read about their technology here:
http://tinyurl.com/bpkx8

Merger signals birth of a new era in market structure!

Seat value up $180k

In addition to a NYSE seat being sold today for $1.8mm (that's an increase of $180k [or ~11%] from the last sale (prior to the arca merger), the lowest offer is now $10mm.

Read about that here: http://tinyurl.com/7mhrn

Congratulations to all Arca shareholders. The most radical change to the burse in 212 years due to our little Arca -- this is something to be proud of!

The NYSE's ship has finally come in as they merge with Arca

NYSE wises up and buys Arca!

NDAQ can have INGP!