Monday, November 21, 2005

What's Fair About a Fairness Opinion?

The next event in the NYX story is the delivery of a fresh fairness opinion from Citigroup -- a concession the NYX agreed to last week in order to quell Mr. Higgens and his group of grumpy rebels.

What exactly is a "fairness opinion?" When and why are fairness opinions issued? The answer to these questions are contained in this insightful article from Bloomberg.

Lazard provided the official fairness opinion in the NYX deal announced on 4/20/2005. In their assessment, they viewed the proposed 70/30 equity split of the NYX as fair. And they will be paid for their time and opinion, most likely, once the deal closes. The hitch here is, the deal closing.

This assumption is based on the fact that ~90% of the time, a bank's fees for their fairness opinion is delivered once the deal closes. (click here for source).

Citigroup has been mutually agreed upon by The NYX and "The DYX" (read: The Higgens group) to issue one final fairness opinion. One thing is for certain, this additional, trivial opinion will cost AX and NYSE shareholders a significant amount of money. That's money that comes from the cash that the NYX will have once the new company has been formed.

There are two possible outcomes to the Citigroup opinion:
1) The current deal structure is fair;
2) The current deal structure is not fair, but here's what is. . .

Regardless of which of the aforementioned outcomes become a reality, the Dec. 6, 2005 vote among NYSE seat holders will commence. The first outcome is pretty straight-forward, however the second one is worth exploring.

If Citi comes back and says that the terms of the deal are not fair, they risk damaging their relationship with NYX and would not likely be considered down the road for investment banking needs that are certain to arise from a rapidly growing, global exchange that sells much more than equities. Any future deals that NYX does might not come to Citigroup when there's a sufficient number of other investment banks that could be used. They also risk making Lazard and Goldman Sachs look bad.

What would Citi gain from issuing an opinion that is considerably different than the deal already struck among Wall Street's greatest titans -- NYSE and Goldman Sachs?

For one thing, an opinion that differs materially from the one already issued, could interfere with the growing value of NYSE seats, and AX's rapidly rising stock value. But, perhaps of greater consequence to Citi, is that if their opinion raises enough questions in the minds of those voting on the deal, to the point where a 2/3 vote is not achieved, and the deal doesn't close, then guess what? Citigroup won't be paid.

So right now, Citigroup holds the key to the vault for AX shareholders, NYSE seatholders (soon to be brethren), Goldman Sachs, Lazard, Citigroup shareholders, and Citigroup itself. That's an awful amount of stakeholders that stand to be hurt if they issue an opinion that is considerably different to the one already issued.

So who gains if Citi comes back with a materially different opinion? To be sure, Higgens and Langone would have significant gains to their egos, but beyond that, not many others'll gain (except for those that decided to write calls on AX to go against the deal).

To be sure, this new fairness opinion is a waste of money and time. There is nothing about the new opinion that has to do with closing this deal. Except, that anything dramatically different might effect sentiment of NYX holders, but probably not their vote since they've seen the value of their seats and future stock skyrocket since the deal was announced on 4/20/2005.

The vote will happen on 12/6/2005, and (most likely) there will be an announcement shortly thereafter letting everyone know that the deal closed -- once and for all. Once the deal is closed and NYX is trading in the public market, this trivial excercise of creating inertia for the deal, will finally be put into the proper light.

One share of AX = One share of NYX

The fact of the matter is that once the NYX is traded publicly, the market will decide on fair value for NYX stock. The percentage of equity ownership has absolutely no consequence on the value for a share of NYX. When someone in the public market goes to buy or sell a share of NYX they won't be asked which side of the merger they came from. The price they get for their shares won't depend on anything related to the percentage of equity ownership of the NYX.

The percentage ownership split matters for NYSE seatholders as it values how many of the outstanding shares of NYX are available to give their current seatholders. For AX shareholders, the split is of no consequence (see: ArcaNews story regarding this here).

The NYX deal has been cleared by antitrust authorities. Now all that's left is the vote that will occur in approximately two weeks. The fairness opinion that Citi issues will be the last distraction thrown into the biggest deal in US stock market history.


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