Friday, September 30, 2005

Morningstar gets it!

This morning Morningstar published an article titled, "Year-old IPOs that deserve a second look."
"The merger of electronic stock exchange Archipelago and the 213-year-old nonprofit New York Stock Exchange will create NYSE Group, a modern for-profit market with a narrow moat."
In the wake of so many bucket-headed articles that have been written recently, this article comes as a breath of fresh air. The article provides insight to content published in the research report that Morningstar issued on 9/20/2005. The title of this report is, "We like the New York Stock Exchange and Archipelago deal."

Here's what Morningstar says about the NYX deal:
"Archipelago (Pacific:AX - News)

Risk rating:
Above average

Recent price % above/below our fair value estimate:

From the Analyst Report:
'Markets have long been good businesses. Since at least medieval times, for-profit marketplaces have offered safety to merchants and buyers, providing theft protection and a court to resolve disputes. The merger of electronic stock exchange Archipelago and the 213-year-old nonprofit New York Stock Exchange will create NYSE Group, a modern for-profit market with a narrow moat.' "

More nonsense from WSJ's Lucchetti

Today's WSJ has an article written by Aaron Lucchetti titled, "Langone Lobbies Against NYSE Deal." Once again, WSJ editors have approved an article with absolutely no merit and zero news-worthiness. Let me explain.

For starters, Lucchetti writes, "He [Langone] has spoken with individual NYSE members and officials of brokerage firms and the floor-trading firms known as specialists; together these people he spoke to control more than 100 of the NYSE's 1,366 memberships, also known as seats, two of the people said. . ."

Two things in this single paragraph are worth noting:
1) ~100 seatholders are Langone's target market -- As we explained yesterday, there are 1366 seatholders in total. 2/3 of these guys need to bless the NYX deal. That comes to 910 votes. Yesterday, Reuters' writer Scott Malone deemed it worth his time to scribble an article that states that there might be as many as 11 new
dissidents joining the anti-NYX revolt. Adding the (conservative number) 300 dissidents that Lucchetti wrote about at the beginning of August (see "WSJ reporter can use ride on short bus" at here at ArcaNews for more on that pathetic piece). We get 411 nay-sayers. This assumes everyone that is spoken to joins Langone's revolt. 1366-411 = 955 seatholders still in favor of the NYX deal. That leaves 7% more seatholders that would need to join the revolt in order to create 1/3 of seatholders voting against the NYX deal. But wait, there's more idiocracy in Lucchetti's diatribe.

2) Look at Lucchetti's source for quantifying the number of people that Langone is barking at. See the last line of the quote from Lucchetti's article above. ". . .control 100 seats, two of THE PEOPLE SAID. . ." Begs the question, what people?

Lucchetti writes, "In the past three weeks, Mr. Langone has held several conference calls and one dinner to help drum up opposition to the Big Board's plan, according to people familiar with the meetings. . ."

People familiar with the meetings? This is the WSJ and all they can do is name nameless sources? The mediator of the conference calls is familiar with these meetings, does that make them a solid source?!

Lucchetti writes in the article, "Many NYSE member firms have yet to decide how they will vote on the deal. Most have remained silent, awaiting more details from the exchange. LaBranche's chief executive officer, Michael LaBranche, meanwhile, spoke positively about the deal in the weeks after it was announced. . ."

Two things about #3 above. What about the fact that most members have not spoken with the media about the NYX deal imply that these members are unsure of which way to vote? How does Lucchetti jump to this conclusion?!

Finally, Lucchettis writes that LaBranche has spoken positively about the deal.
Thing is, towards the beginning of this article Lucchetti writes, "Among the firms Mr. Langone has spoken with are: LaBranche & Co., a specialist that owns 39 seats; Bank of America Corp. specialist operation and Susquehanna International Group LLP, which owns a smaller NYSE specialist firm called SIG Specialists, people familiar with the matter said. . ."

LaBranche has stated that they're pleased with the deal and its terms, so what difference does it make if Langone talks with them? Also, who at LaBranche did he speak with? Their board? Mr. LaBranche himself? And in true Lucchetti fashion, the nameless sources here are "people familiar with the matter."

Stick with the facts and try to filter out the nonsense that a handful of bidness writers scribe. This deal is amazing, and that's why Goldman brokered it, why the NYSE board approved it, and why Mr. Putnam is being named a president of the new NYSE. It's also why the price of a NYSE seat is hitting all-time highs.

Just hang in there until the deal goes through. Then hold on tight as the NYX launches into the global trading marketplace for things other than just stocks. ETFs, bonds, computing power, futures, options. . .They're all coming to the incredibly efficient, top-of-mind share, electronic mega-bourse we know as the NYSE!

Thursday, September 29, 2005

Reuters' Malone to join Luchetti on short bus

Reuters (current parent of INGP until NDAQ deal closes) writer Scott Malone produced an article today that is more ridiculous rhetoric that so many business writers are scribing as they try to fill the time until the NYX deal closes.

Malone's article has the headline, "More NYSE seatholders join Archipelago deal suit." At first blush this implies that Reuters has unearthed some news-worthy insight into the NYX deal. Conjures up an image of a growing group of disgruntled seatholders that will try to thwart a NYX deal. Then you read the rest of the article and it becomes clear that this is about as news-worthy as an elementary school's recess kickball game score -- who the $@%! cares?!

Malone wastes his readers time by stating that
, "Seven new seatholders joined a suit first brought by William Higgins in May, claiming the terms of the deal are unfair to the exchange's 1,366 seatholders. With the addition of the new members, 11 seatholders now oppose the merger. . ."

Once again, lets look at the facts:
2/3 vote is needed for the NYX deal to be approved by the NYSE members. That comes to 910
votes saying "yeah" to enable the deal to go through.

11 seatholders anti-NYX? Maybe Malone figures that 11 seatholders added to the ~200 or ~300 seats held by Mr. Urstadt's group (the real-estate executive who WSJ wrote about at the beginning of August [see below, "WSJ reporter could use ride on short bus"]) makes a difference.

Again, lets run the numbers:
1366 seatholders - 300 (just to be conservative) from Urstadt's gaggle = 1066 seatholders left to vote for the deal to go through. Now lets add Malone's latest discovery to the equation:

1066 - 11 newly disgruntled ner-do-wells = 1055 seatholders voting in favor of the NYX deal.

NYX needs 910 "yes" votes. 1055-910 = 145 more "no's" necessary to toss a hurdle in front of this landmark deal. Another way to look at 145 is that it's 10.6% of the total base of seatholders that would need to vote to thwart a deal that makes them quite wealthy.

Malone, maybe you and Aaron Lucchetti from the WSJ should get together and write a book. Maybe call it, "Dummies for Dummies."

Tuesday, September 06, 2005

Shareholder equity for NYX shareholders will be uniform

rather interesting discussion about the impact of the percentage ownership stake has emerged in the Arca bleachers (ie., The Y! Finance message boards). For the sake of continuity and depth of concepts achievable with links, thought it'd be fun to forward the discussion here to ArcaNews. To be sure, reasonable people will disagree, but that's what makes a market. Please feel free to post your comments at the end of this post. Bottom line here is that shareholder refers to NYX shareholders and the equity each NYX share/holder has in NYX is equal.

The premise to this discussion derives from a post here at ArcaNews which states that the percentage ownership stake of NYX is trivial to AX shareholders. The fact is that one share of AX will convert to one share of NYX. This fact is stated in the S-4 filed with the SEC.
Again, here's specifically what the S-4 says:
"In the proposed merger, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

Before getting into the discussion, here's a primer on some of the concepts alluded to below.

Shareholder Equity
: Appears on a firm's balance sheet as a line-item. It is calculated by taking the total assets and subtracting the total liabilities. Click here for a fairly good explanation of Shareholders' Equity and understanding a balance sheet.

Revenue: The money received by a firm as a result of its activities (generally sales activities). This number is found on an income statment. Click here for a fairly good explanation of revenue.

Net Operating Income: Also found on a firm's an income statement. Expressed as a formula, it's:
Revenue - Cost of goods sold - sales discounts - sales returns and allowances - expenses

(it's worth noting AX's net operating income growth over the last few years. Check out how AX has grown this line here!!)

Economic Value Added ("EVA"): Expressed as a formula, it's:
Net Operating Income After Taxes - (Capital x Cost of Capital). Click here to learn about EVA from the folks that coined the concept.

These are the basics. Certainly most around here understand them, but it never hurts to put some information out there.

Now, here's a re-post of the discussion from Y! Finance message boards:

A few points I need to make:

With regard to the Charles Gasperino article. THis guy does not understand the economics of the NYSE. I agree with the points you made on your website. But you need to add that the price of making the trade is only a small fraction of the overall cost to the stock trader. By far the bigger "cost" is the bid-ask spread. The smaller exchanges he cites as competitors willing to underprice the NYSE can never do it unless the NYSE raises their prices VERY substantially. Their illiquid markets will never create good price discovery and the bid ask spreads will be so wide you could drive a truck through them - the overall cost to the stock trader is then much higher even with lower trading fees on these smaller exchanges. In a sense, the NYSE is the low-cost provider.

With regard to the 30/70 split or 80/20 split being irrelevent - I disagree. Yes, the AX shareholder will receive one NYSE share for one AX share - but depending on the split, there could be a lot more NYSE shares out there and our share would represent a smaller portion of the company ie, we would own less of the company it does matter - a lot. Think about it, if the split was 99% NYSE vs 1% for AX - wwould this not matter? We could still own one share of NYSE, but it would only represent a small sliver of equity in the new company."

Thanks for your insight flash. I think we see the fraction of ownership issue differently. Take the hypothetical example of 99%/1% and the issue of how much equity in NYX an AX shareholder will have. When an AX shareholder sells a share of NYX, they will receive in return for the share the entire price of a share of NYX. They won't receive 1% of the value of a share.

Take it to the balance sheet where shareholder equity resides. Once AX becomes NYX they'll use the same balance sheet. The balance sheet will not break out shareholder equity for one-time AX shareholders and shareholder equity for NYSE seat holders. There will be one line for shareholder equity and that value will be uniform across the board for all shareholders of AX.
Think of this way:
One apple pie = NYX
if you cut the pie into 30 pieces or you cut it into 70 pieces, in the end you still have one pie. That pie has all the same ingredients contained in each slide. And the end product of all the ingredients is the entire pie.

if NYSE seats/AX shares = NYX, each piece contains the same ingredients, and each piece tastes like apple pie. The taste is not diluted due to small slices/big slices. All the ingredients are blended.

Same here: each item on the balance sheet, statement of cash flows, and income statement is analagous to each ingredient in an apple pie. That apple pie is NYX, the public company with one uniform share value at any given

Reasonable people will disagree. Here I think we just agree to disagree. The split isn't going to change. Thain, his board, and filings have essentially branded the fact that it's 70/30 - period, end of discussion. This chatter is just fun fodder while we wait for the deal to materialize and ArcaEx to spring into action.

Thanks again for yer insight!"

"I totally agree that if the intention is to buy NYSE shares AFTER the merger then it makes no difference what the split turns out to be...but if you are an owner of AX now it could mean a much thinner slice of pie.

Thanks for keeping the site going. Are you really 90 years old? "


"I have to disagree with your analogy...

While shareholder equity will be the same for NYSE seat holders and AX shareholders post-merger, shareholder equity for AX shareholders could very well diminish prior to the merger. How ? The NYSE shareholders have not had any shares allocated so far. That means the new company will have to generate new shares of stock for every seatholder on the NYSE.

Let's say you have 300 share of AX. Regardless of the merger you'll still have 300 shares, and 300 votes for proxy. But Mr. Seatholder had 700 created for him as a result of the settlement. Has your influence diminished for proxy-related issues ? Yes, assuming you don't buy more shares ahead of time. Will your price/share diminish ? It has to. If all shares are priced equally, the value of a share has to decrease, assuming a constant market cap value. Adding more shares will lead to a dilution in price.

Going back to your analogy, you said,
"One apple pie = NYX
If you cut the pie into 30 pieces or you cut it into 70 pieces, in the end you still have one pie. That pie has all the same ingredients contained in each slide. And the end product of all the ingredients is the entire pie."

True, but how many apples are you putting into the pie in the first place ? Are you counting, say, only the 30 you're contributing, or have you neglected to recognize that someone else wants to add 70 more to the pie ? It may taste really good as a whole, but your initial contribution has just been minimized.

Values for current AX shareholders can only be justified if trader sentiment believes in the long-term viability and growth of the company, and is also reflected by an increase in the company's market cap. Otherwise, the stock may seem overpriced.

I'll keep an eye on further developments. AX is an interesting story, both in the short and long term.

All this talk about apple pie is making me hungry. I'll have some peach cobbler for dessert tonight. "

"Thanks for your analysis -- like a said, this is a fun excercise.

Guess we too, agree to disagree.

Here's what I mean:
You say,". . .shareholder equity for AX shareholders could very well diminish prior to the merger. . ."

I say that shareholder equity is the same for ALL NYX shareholders. There will be one balance sheet, and the numbers on this financial statement apply to one company. That compant is NYX. There won't be any footnotes stating that only a fraction of the NYX shareholders' equity belongs to people that owned a piece of AX prior to the merger.

It's inconsequential that any shareholder equity diminishes prior to the merger because prior to the merger, there will not be any NYX shares. These shares are AX after some plastic surgery. Certainly there are NYSE seats for sale, but these seats only reflect the implicit value that NYSE merging with AX creates. That's another reason seatholders, as a whole, are happy with this merger. Until the merger is complete (likely Q1 2006), AX will have its own financials. The numbers contained on these statements will not include any synergies or accretion of the NYSE bidness. That stuff happens once the deal is done and AX and NYSE are a one single unit. This unit will be NYX.

Another way of thinking of it (to steer away from desserts) is that you have a 1959 Studebaker Lark. No doubt, a pretty cool car. Thing is the engine's old, rusted, and not up to snuff with engines that are in some of today's cars. So, you put a 2005 Corvette engine in the Studebaker and clean the car up. That old '59 Lark's value intrinsicly improves due to a brand new, efficient and powerful engine. Here the Studebaker is the NYSE and the 'vette is AX (please forgive some of these metaphors!).

If all owners of the '59 Lark were told they they'll get new engines that are compatable with their antique car and would give their old buggies new life, these owners would rejoice and be happy to pay a bit of a premium for the engine. That's cuz the new engine represents new life for their historic wheels.

So, I stand behind my original statement that to AX shareholders the split of ownership is trivial.

Free Web Counters