Monday, April 25, 2005

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.


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