Tuesday, June 20, 2006

CME's Potential Competion

Today, CME essentially has the Futures market cornered. However, when the NYX/Euronext deal closes and the new synergistic, revenue-diverse, powerhouse of the new transatlantic bourse is operating, the CME will have formidable competition.

A brief story from Dow Jones hit the wire a little earlier this afternoon. In the story by Margot Patrick, from Dow Jones Newswires CME CEO, Craig Donohue, is cited. Patrick's piece says, "Speaking to journalists at a briefing in London, Donohue said Euronext 'is already a very formidable exchange, well-run, with good technology and depth of expertise in derivatives. I always have viewed it as a significant competitor and this doesn't change that.'"

Of course this isn't really news and NYX's continued penetration into deriatives is no surprise. However, it's always nice to hear how Mr. Donohue feels about this landscape changing deal.

Also, it's worth noting the brilliant foresight of Jerry Putnam and Arca's amazing leadership team for having former CME CEO, James McNulty, become a director (since 8/2004). After AX and NYSE joined forces, Mr. McNulty was named to the NYSE board, on which he currently sits.

Mr. McNulty served as President and Chief Executive Officer of the Chicago Mercantile Exchange from February 2000 to December 2003, and of Chicago Mercantile Exchange Holdings Inc. from August 2001 to December 2003. He served as a director on the boards of Chicago Mercantile Exchange Holdings Inc. and the Chicago Mercantile Exchange from April 2002 to December 2003 and previously served as a non-voting member of these boards (click here for source).

Wednesday, June 14, 2006

NYX's Brilliant Move

Management at NYX hasn't missed a beat and continues to execute its plan to become a diversified, global bourse that maintains its worldwide leadership position. With the game-changing merger between AX and NYSE, NYX demonstrated its ability to see where the puck is headed, and moving there quickly in order to make the next play.

With the advent of Reg NMS, NYX positioned itself by combining NYSE with ArcaEx. When the NYX deal was announced, the stock did respond favorably, but then came the threat of Langone and Higgens busting the deal and the threat that the ~1300 seat holders wouldn't vote for the terms of the deal. To be sure, this received considerable attention from journalists and analysts. This is the same pattern that is occuring with the Euronext deal.

The same journalists and analysts are casting doubts that the deal will close on the terms that the two firms have agreed to. With the AX/NYSE deal, reporters and analysts wasted so much ink on the notion that the terms of the deal (the percentage of ownership allocation between AX shareholders and NYSE seat holders) would not sit well with the group of NYSE seat holders. Lucchetti published a piece about the mounting support for busting the deal that Higgens and Langone were building. Each report that there would likely be a disruption to the deal created uncertainty and fueled nervous shareholders to sell their stake. For the most part, those early sellers are probably regretting the faith they put into the dramatic nonsense. Ultimately, the dust settled, the terms of the deal were the final terms of the deal, and it became clear to observers that all of the banter about what would be equitable to NYSE seat holders was merely fodder for WSJ readers.

And, as the game changing news about NYSE and Euronext was released earlier this month, similiar fodder from the same scribes and wizards has begun to emerge. This time, the drama centers around the idea that DB is interested in Euronext and in busting up a NYX/Euronext deal. Again, it's back to the terms of the deal.

The scribes and wizards have painted a picture that DB is eager to purchase Euronext, and is willing to counter-bid a NYX offer in order to do that. In a market that's already nervous about the broad economy, these sort of stories add to the anxiety that many investors are feeling. And this tends to shake out lots of investors. We've seen that.

The reality is that like others in the Exchange space, DB's stock has taken a 20% beating. On 5/9/06 the stock was at 127 and closed yesterday at 102. While not quite as dramatic as the drop in NYX shares since the hysteria about a potential DB counter-deal emerged, is down ~25% (NYX is ~51/share as of this post and closed at ~68 on 5/9/06).

Despite what the scribes and wizards print, Euronext is clearly in favor of the NYX deal. It looks like the path of least resistance will be a NYX/Euronext merger, and again, that will prove the publised journalist and analyst reports to be fodder for business-news fans. In the meantime, the NYX shares reflect the "voting machine."

However, when one focuses on the merits of the Euronext deal, the margin expanding potential of a global bourse, looks at things through things like a Porter Force analysis, assesses the long-term value creation, and pays attention to the brilliant strategy and execution of a top-notch management team, then one can see this deal for what it is truly is -- a demonstration of strategic and brillian management.
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