NYSE Euronext can thrive, even without scuttled deal
EU regulators may have killed the merger with Deutsche Boerse, but the NYSE remains a very attractive business -- and an inexpensive stock.
The stock price of NYSE Euronext (NYX) sank 1.8% in trading on its own exchange Tuesday as traders and investors braced for word that the European Commission would block the company's proposed merger with Deutsche Boerse AG as being anticompetitive. Their fears were realized as the EU ruled against the merger Wednesday.
Strictly speaking, the regulators are probably right: In the short run, at least, the merger would have left investors with fewer independently owned trading platforms. But does that really matter in the global financial world we inhabit? And should investors really respond to the prospect of the failed merger by dumping their holdings in NYSE Euronext?
If you question whether or not we live in a relatively seamless global financial market, just talk to any hedge fund manager or watch what happens as markets as far away as South Africa, Vietnam and Colombia respond to events in Europe.
There was a time when, to be considered truly independent, a country needed not only a seat at the United Nations but a flag, its own airline and (if it happened to be capitalist) a stock exchange. Even Albania embarked on a quixotic crusade to build its own stock exchange from scratch (in a basement room in the country's ministry of finance) after tossing the Communists out of power.
But we're well past those days now. The rise of electronic trading and a wave of mergers and acquisitions have already broken down old structures and borders. Mergers shaped the NYSE and Euronext long before those two organizations combined to offer clients seamless and relatively low-cost trading across different platforms. In theory, reduced competition could lead to higher costs; in practice, any abuse of a monopolistic or oligopolistic status on the part of a merged NYSE Euronext/Deutsche Boerse would probably be rapidly followed by another surge of innovation as other players create different kinds of trading platforms that users find more appealing and just as effective. Already, many of the trades executed via the NYSE are negotiated on other platforms.
But even as financial markets have gone global, regulations remain national or, in the case of the EU, regional. And it seems unlikely that the EU commissioners will pay much heed to the argument by the two exchanges that their combined market share should be viewed as a subset of the total market including over-the-counter derivatives. (The combined exchange would have a 93 percent share of the trade in exchange-traded derivatives, such as index options.) "My conclusion is that some problems of competition will not be solved by this merger but will be aggravated," the EU's antitrust chief Joaquin Almunia told Bloomberg TV late last week from the World Economic Forum in Davos, where the exchanges were battling to win allies in their increasingly uphill fight to gain regulatory approval for the deal.
The proposed merger was announced nearly a year ago. Since then, analysts have noted that the share prices of the two companies have been tightly linked, as was to be expected in an all-stock merger. The problem? Europe's woes have spilled over into Deutsche Boerse's share price and may well have pulled down the value of NYSE Euronext, as well.
The reality is that when looked at as an independent company, the U.S./Paris exchange giant is a very attractive business, trading at only 10.8 times trailing 12-month earnings and offering investors a relatively lavish dividend yield of 4.5%. Analysts are divided about the impact of the failed merger -- CLSA boosted the stock to "buy" from "underperform," while RBC cut the stock to sector "perform" from sector "outperform," attributing its decision to forfeited growth and the prospect of a slowdown in trading activity.
Nonetheless, the picture looks relatively bright for NYSE Euronext. It has done a good job of develop a trading technology business that has replaced revenues once generated from the core trading operations; it's still the destination of choice for many blue-chip companies. (We likely won't know for some weeks whether Facebook will choose to make its debut on the NYSE or Nasdaq.) The company's operating margins are robust, and even the lowest analyst estimate of $28 is higher than the current share price of $26.56. (The average analyst price target is $34.23 a share.)
While analysts have been trimming their estimates in the last quarter, the company is still expected to report a profit of 51 cents a share for the fourth quarter when it announces year-end results next week. That would be up from 46 cents a share in the same quarter in 2010.
Betting on the stock exchange merger's approval might have been foolish, but betting that NYSE Euronext can't make it on its own, or that it won't find other ways to expand its platform, would be still more foolish.
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