Repetto Keeps Missing

This morning Sandler O'Neil analyist, Richard Repetto, is once again talking down NYX. He's been talking NYX down since AX days, and has clearly demonstrated that he does not understand the equity market space. Please scroll down to a few posts back with the analysts scorecard to get a sense for how incredibly inaccurate Repetto has been for quite some time.

This morning, Reuters reports that Repetto is citing a potential for a loss in market share as his reason for questioning NYX's growth prospects. You can read this nonsense here.

Market share concerns are nothing new to the NYSE. Click here for a post at NYSE ArcaNews that discusses how market share erosion worries have existed for over 30 years.

Repetto doesn't mention NYSE market share gains in options and ETFs. NYSE market share in these products continues to increase substantially. For example, for the Q's ("QQQQ"), the most heavily traded ETF, NYSE Arca market share is ~33% today. That's roughly 33% greater market share than NYSE did in the Q's trading prior to this month.

ETFs are the mutual fund for the 21st century. Since 1982's codification of 401(k), there's been explosive growth for mutual funds. However, ETFs are slowly making mutual funds obsolete. Here are the numbers (as reported by the Investment Company Institute):

• Total Mutual Fund Assets as of 3/22/2006 = $2.056 trillion (source here)
  
• Total ETF assets as of January 2006 = $312.79 billion (source here)

Wayne Gretzky credits much of his success to always trying to play where the puck was headed (click here to read about that). Each day it becomes more evident that the mutual fund puck is headed to ETFs. It'd sure be nice if analysts like Repetto could pick up on these sort of things instead of publishing periodical bear-crap about the potential for market share erosion. But, according to Gretzky, it was his ability to sense and skate to where the puck was headed that seperated him from the pack. It's clear that Repetto isn't all that familiar with that concept.

While on Repetto, it'd be a shame to leave out his claim that the incredible potential of the NYX has already priced into the shares. According to Repetto, the surge from ~64 (AX's last closing price) to levels in the mid-70s is a result of media coverage of the NYX IPO. According to Repetto, at $64 all of the potential for NYX was already baked in.

According to Repetto, all of the potential for NYX was baked in when the shares were selling for less than $30. See his downgrade of AX at $27 on 4/22/2006 - just two days after the announced AX/NYSE merger (scroll down to the Analyst Scorecard). Talk about accurate forecasts! Why the media still turns to people like Repetto and Herr for statements is mind boggling.

TheStreet.com 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 Street.com'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.

Analyst Scorecard (Click Below For Larger Image)

 

More from the UK on NDAQ's LSE Bid

In this piece, The Daily Telegraph discusses Clara Furse's (LSE CEO) insistance for JP Morgan to step down from their role as investment banking advisors for NDAQ. The end of the article says,

"Nasdaq faxed its offer to the LSE at 4pm on Thursday but Furse had already left for the weekend.

She took part from Morocco in a conference call held by the board to discuss the deal, which led to the decision to reject it.

JPMorgan said: "As a matter of policy, we do not support unfriendly approaches for corporate broking clients and have stepped down as adviser to Nasdaq."

London's Perspective of NDAQ's LSE Bid

The UK's Daily Telegraph ran a story today regarding the NDAQ bid for LSE (click here for the story). It's interesting that NDAQ demanded in it's faxed offer letter, that the LSE respond "formally."

One can't help wonder about such a demand. What benefit could NDAQ derive from a formal response? Maybe the answer is evidenced by NDAQ's share's getting a lift once LSE's response hit the wires.

Here's a highlight from the Daily Telegraph's piece today:

"He [NDAQ CEO, Bob Griefield] has also managed to anger the LSE management and advisers with the style of his approach, delivered by an abrupt fax on Thursday which included a demand for a formal response. For a supposedly hi-tech company to use the fax raises a giggle."

Secondaries and Details on NYX Lock-up Restrictions

To be sure, the upcoming secondary has many wondering what the potential near-term impact is for NYX shares. Of course there's no way to predict what the market's reaction will be, but we can look at an example of a highly publicized secondary, and the near-term reaction of the market.

GOOG was priced at $295/share and the closing price on the day of the secondary was $303 (click here for source). They issued 14,159,265 shares (a number they chose to correspond with Pi).

On 9/9/05 GOOG closed at $299 as the market anticipated the secondary. The secondary occured on 9/13/05. Here's how volatile GOOG was in the period surrounding its secondary:

9/09/05: $299 Volume = 4,390,500
9/13/05: $311 Volume = 10,299,900
9/16/05: $300 Volume = 7,579,800
9/23/05: $315 Volume = 8,483,800

SIX MONTHS LATER
3/10/06: $337

Articles from Lucchetti and quips from Reppetto and Herr help foster the notion that the secondary is something for investors to be cautious of. However, history shows these guys create drama that ultimately amounts to being a waste of time and focus.

Friday's news about NDAQ's failed bid for LSE serves as the latest fodder for drama about the NDAQ/NYX competition. It's just that though -- drama.

Sorry, getting back to the lock-up restrictions. Here's some information about the lock-up restrictions:

DESCRIPTION OF NYX LOCK-UP RESTRICTIONS

On page 136 of the NYX s-4, the NYX lock-up restrictions are described. Here's an exerpt:

"This section of the document describes the material terms of the three support and lock-up agreements entered into by certain Archipelago stockholders as described below. The following summary is qualified in its entirety by reference to the complete text of the support and lock-up agreements, which are incorporated by reference into, and attached as Annexes B, C and D to, this document. We urge you to read the full text of each support and lock-up agreement.

Concurrently with the signing of the merger agreement, the NYSE entered into separate support and lock-up agreements with the following parties or groups:

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General Atlantic Partners 77, L.P., GAP-W Holdings, L.P., GapStar, LLC, GAP Coinvestment Partners II, L.P. and GAPCO GmbH & Co. KG (which we refer to collectively as “General Atlantic”);

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GS Archipelago Investment, L.L.C., SLK-Hull Derivatives LLC and Goldman Sachs Execution and Clearing, L.P. (which we refer to collectively as “Goldman Sachs Group”); and

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GSP, LLC, which is an entity affiliated with Gerald D. Putnam, the chairman and chief executive officer of Archipelago.

The support and lock-up agreements were amended and restated as of July 20, 2005. Together, the support and lock-up agreements cover an aggregate of 18,870,405 shares of Archipelago common stock beneficially owned by the entities listed above, which as of June 30, 2005, represented approximately 40% of all of the issued and outstanding shares of Archipelago common stock on a fully diluted basis.

Agreement to Vote with Respect to Archipelago Common Stock

In the support and lock-up agreements, each of General Atlantic, Goldman Sachs Group and GSP agreed to vote all of its shares of Archipelago common stock (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation) in favor of the mergers and the merger agreement and against:

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any other acquisition proposal (as defined in the merger agreement) with respect to Archipelago;

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any proposal for any merger, consolidation, sale of assets, business combination, share exchange, reorganization or recapitalization of Archipelago that is in competition or inconsistent with the transactions contemplated by the merger agreement;

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any liquidation or winding up of Archipelago;

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any extraordinary dividend (other than any dividend expressly permitted by the merger agreement) by, or change in the capital structure of, Archipelago (other than any change in capital structure resulting from the mergers or expressly permitted by the merger agreement); and

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any other action that would reasonably be expected to impede, delay, postpone or interfere with the transactions contemplated by the merger agreement or result in a breach of the representations, warranties, covenants or agreements of Archipelago under the merger agreement that would reasonably be expected to materially adversely affect Archipelago.

Each of General Atlantic, Goldman Sachs Group and GSP also agreed that, if the merger agreement is terminated under any circumstance in which the termination fee and expense reimbursement would be payable by Archipelago under the merger agreement, then, for 15 months following this termination, the stockholder would not transfer any of such shares of Archipelago common stock held by such stockholder, and it would (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation as described under “The Special Meeting of Archipelago Stockholders—Voting Limitations”):

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vote all of its shares (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation) against any acquisition proposal for Archipelago at any annual

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or special meeting of Archipelago stockholders or in any other circumstance in which a vote, consent or other approval is sought (however, this obligation does not apply to GSP if it had voted in favor of the mergers); and

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refrain from encouraging, facilitating or supporting in any way any such acquisition proposal or any proposal that would reasonably be expected to lead to any acquisition proposal for Archipelago.

The aggregate number of shares of Archipelago common stock subject to this requirement to vote against any acquisition proposal during this 15-month period cannot exceed 30% of the Archipelago common stock issued and outstanding as of the date of the vote.

Restriction on Transfers of Archipelago Common Stock

In general, General Atlantic, Goldman Sachs Group and GSP agreed not to sell, pledge or transfer any of their shares of Archipelago common stock at any time during which the above voting obligations apply. There are two exceptions to this obligation under the support and lock-up agreement for GSP:

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first, prior to the completion of the merger or termination of the merger agreement, GSP is permitted to pledge, hypothecate or gift to charity up to 301,212 shares of Archipelago common stock, as long as the value of these gifts, determined based on the closing price of Archipelago common stock on the date on which the gift is made, do not exceed $750,000 in the aggregate; and

•

second, if the merger agreement is terminated under any circumstance in which the termination fee and expense reimbursement would be payable by Archipelago under the merger agreement, GSP may pledge, hypothecate or gift to a charity its shares of Archipelago common stock during the 15-month period, if applicable, during which GSP is obligated to vote against any acquisition proposal for Archipelago.

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.

The NYSE Group board of directors has the right to remove the transfer restrictions imposed on General Atlantic, Goldman Sachs Group or GSP. If it exercises this right, or if it removes the transfer restrictions on any shares of NYSE Group common stock received by the NYSE members in the mergers, then the NYSE Group board of directors is required to simultaneously remove the transfer restrictions from a proportionate number of shares of NYSE Group common stock held by General Atlantic, Goldman Sachs Group and GSP. This matching right to release also applies to shares held by General Atlantic if the NYSE Group board of directors releases certain shares held by Goldman Sachs Group, and to Goldman Sachs Group if the NYSE Group board of directors releases certain shares held by General Atlantic. Similarly, if the NYSE Group board of directors removes the transfer restrictions on any shares of NYSE Group common stock received by General Atlantic or Goldman Sachs Group in the mergers, then the transfer restrictions automatically will be be removed from a proportionate number of shares of NYSE Group common stock held by the former NYSE members."

NYX = Global Leader

NYX had an amazing first day of trading. The stock rocketed to 88 the next day, and since then there's been a spattering of profit-takers cashing in their gains. The sellers are most likely those AX shareholders that are satisfied with their impressive returns, and short-term traders that are booking nice gains since Tuesday's AX close at ~$64.

The interest in NYX has been tremendous judging from our volume. With volume comes plenty of folks that just are not familiar with the opportunities that NYX now has. Those folks give buying opportunities to those aware of the incredible potential that NYX has.

The seatholders (who are absolutely aware of the NYX potential) mostly took their $300k in stock which indicates that they, for the most part, understand the long-term growth potential for NYX.

NASDAQ TRIES (and Fails) AGAIN

That said, today there was some news on the wire around 12:15 PM EST. The headline was that the LSE rejected a takeover bid by NDAQ. A subsequent article in the WSJ rambled about NDAQ's bid and the liklihood that NDAQ would come back w/another offer.

The reality is that NDAQ has failed in Europe. They've been down the road of trying to purchase LSE before. Click here to read about their failed effort in 2000. Click here to read about their collossal waste of money with Nasdaq Europe.

The market jumped on the idea of a tie-up between NDAQ and LSE. NDAQ's stock price soared over 10%. Volume for NDAQ also soared. These are clear indications that, for the most part, the market is scratching their collective head to figure out who the real leader in the exchange world is.

It's clear to ArcaNews that the leader is NYX. The confetti is settling on Wall & Broad, and it won't be long until the NYX begins executing its plans. Plans which include broadening its revenue base, acquiring other exchanges internationally, and cutting costs thereby expanding margins.

Ben Graham's insight comes to mind. "In the near term the market is a voting machine, and in the long run it's a weighing machine."

As ArcaNews has said all along: In the long run, NYX tips the scales.

Misleading Info from Lucchetti; The Real Skinny About the NYX IPO

(update added regarding Lucchetti's actual statement in today's WSJ, link to S-4 that doesn't require login information, and link to the press release mentioned below)

Before getting into the latest misleading information that Lucchetti's written, I want to take a minute to say CONGRATULATIONS (once again) to everyone at Arca and at The Big Board for making it through the regulatory, political, and just outright, circuitous obstacle course that has lead to the closing of what is arguably the most dramatic, landscape-shifting deal in Wall Street's history -- truly!

When the closing bell rings on March 7th, it will be a bittersweet chime. Bittersweet because it will mark the end of Arca as a stand-alone enterprise. However, the Porshe engine that is ArcaEx has now been installed in a Lincoln Town Car (the NYSE), and the merger of these two amazing companies will lead the future of bourses globally. And that's where the sweet part of bittersweet comes in.

Perhaps the rock group Semisonic put it best, "Every new beginning comes from some other beginning's end."

So onward and upward we go. John Thain puts things eloquently in his press release announcing the SEC's approval. He says, "This will mark the beginning of a new era for the Exchange and America’s financial markets. As a for-profit, publicly held company, the NYSE Group will be better positioned to grow, create value and compete globally. We will provide customers with more choice in trading, an advanced technology platform, a broader product mix, and listing opportunities among a wider group of companies. This is an exciting and historic time for the entire Exchange community, our Archipelago partners, our customers, our future shareholders and America’s investing public."

LUCCHETTI ARTICLE

Ok, on to Mr. Lucchetti's article in today's WSJ.

Guessing by the number of folks in the AX bleachers (Y! Finance Message Boards) who have asked about how shares of AX will convert to shares of NYX, there seems to be some confusion. WSJ reporter, Aaron Lucchetti perpetuates this confusion in today's WSJ. He writes:

"The initial batch of stock will be distributed to NYSE seat holders and employees and Archipelago staff under terms of the companies' merger. The secondary offer could raise $1 billion to $2 billion, depending on how many Big Board seat holders decide to sell some of their shares in the new company."

So, folks who read that may gather that the initial NYX stock will be held solely by NYSE seat holders and employees of AX and NYSE. He even concludes that the secondary offer is contingent on how many Big Board seat holders decide to sell their stock. This is misleading and not accurate.

The reality is, that AX shareholders, NYSE seat holders, and employees of AX and NYSE will own (and do own) the initial batch of NYX stock.

As stated in the S-4, one share of AX will convert to one share of NYX. Please click here to view this SEC filing, and then go to page 12. At the top of page 12 (the first question on the page), it clearly states:

Q: What will I receive in the mergers if I am an Archipelago stockholder?

A: If you are an Archipelago stockholder, you will be entitled to receive in the mergers one share of NYSE Group common stock for each of your shares of Archipelago common stock. If you hold any Archipelago stock options to acquire
Archipelago common stock, you will receive options to acquire an equal number of shares of NYSE Group common stock.

So, Lucchetti's lack of insight perpetuates the notion that the NYX is having an IPO in the traditional fashion. It's clear that there are a substantial number of investors that are totally clueless about their ability to own NYX today, by having their AX shares convert to NYX shares on 3/8. If one relies on getting information from places like WSJ, CNBC, Bloomberg, and The Nightly Business Report, one gets the idea that the NYSE is going public in the same manner that most companies go public. The message that the NYSE is having an IPO is somewhat misleading. Misleading because there seems to be a lack of emphasis on the fact that AX will convert directly to NYX.

Next week will probably be chock-full of stories that mislead folks to believe that to own NYX they need to wait until 3/8, when the NYSE "goes public." There's already discussion about the high demand for NYX when it opens for trading. Thing is, it's already open for trading -- under the ticker "AX."