Monday, March 20, 2006 to Join Short Bus

Our metphorical short-bus has some long-standing passengers like WSJ's Lucchetti and NewsWeek's Charles Gasparino (see ArcaNews entry here for Gasparino's nonsense). But today, a new name boards the bus.

The's, Lauren Rae Silva hopped on today. Her story (click here to read) today has the headline, "NYSE: Before the Flood." She starts her prose with this misleading statement:

"Former seat holders of the NYSE will see their dreams of riches come true next month when the newly public exchange lets them cash in their stock via a secondary offering. In light of that, nothing could be luckier for these expert market makers than the dizzying run the shares have taken over the last year."

The problem with what Ms. Rae Silva says is that it implies that the supply of NYX shares will flood the market as former NYSE seat holders cash in their ~80,000 shares. Reality is that these seat holders have considerable lock-up restrictions on their share of NYX volume.

The NYX s-4 Filing clearly lays out these restrictions. Here again is what the filing says regarding lock-up restrictions:

(Source: S-4; Page 136 of S-4. Click here to read filing.)

"Lock-Up of NYSE Group Common Stock

Each of General Atlantic, Goldman Sachs Group and GSP agreed in the support and lock-up agreement not to sell or transfer any shares of NYSE Group common stock that they receive in the mergers for a certain period of time after the completion of the mergers. We refer to this period of time as the “lock-up period.” For GSP, the lock-up period expires on the first anniversary of the completion of the mergers, but GSP is permitted to pledge, hypothecate or gift to charity its shares of NYSE Group common stock during this lock-up period. For General Atlantic and Goldman Sachs Group, the lock-up period is the same as that of the NYSE members and expires as follows:

with respect to one-third of their shares of NYSE Group common stock, on the first anniversary of the completion of the mergers;

with respect to another one-third of their shares of NYSE Group common stock, on the second anniversary of the completion of the mergers; and

with respect to the remaining one-third of their shares of NYSE Group common stock, on the third anniversary of the completion of the mergers.

So, Ms. Silva's notion that the market will see a flood of supply that theoretically will out pace demand, thereby creating pressure on NYX's share price, is off base.

First, shares that will be sold by former NYSE seat holders have significant lock-up restrictions. They can't sell all of their shares at once as Silva's article may lead readers to believe.

Second, Ms. Silva goes on to discuss the often referenced PE ratio of NYX as it compares to peers in its industry. Price/Earnings is a poor measure of a company. This holds true for many reasons. One such reason includes the relative ease of using GAAP to manipulate earnings numbers. For this reason (and others), Price/Book is generally a more accurate indication of a company's valuation.

The WSJ's Steve Gelsi reported on 3/8/2006 that the NYX looks undervalued on a Price/Book basis. He writes: (click here for article [subscription to WSJ required])

"The NYSE Group's price-to-book value will be 9.1, lower than the 20.4 for Nasdaq, 15 for IntercontinentalExchange, 9.8 for the CBOT, and 13.4 for the Chicago Mercantile Exchange"

Click here for a concise review of Price/Book.


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