The Intercontinental Exchange (ICE) (NYSE:ICE) announced that it plans to buy the NYSE Euronext (NYSE:NYX) for $8.2 billion ($33.12 per share). If you are confused about the deal and what impact it will have on the existence of the NYSE, the best-recognized symbol of the world's financial markets, you are not alone.
What Is ICE?
ICE or Intercontinental Exchange is an Atlanta-based company that operates marketplaces that trade over-the-counter (OTC) as well as futures-based energy and commodity contracts. It also offers trading in derivative financial products. ICE deals in more than 1,000 contracts in most commodities, including crude oil, sugar and cotton.
SEE: Commodities: The Portfolio Hedge
What Is the NYSE?
The New York Stock Exchange has a 220-year history as one of the most storied and best-known stock exchanges in the world. In 2007, the NYSE merged with Euronext, an electronic exchange based in Europe. The merger, according to both sides, was to give both exchanges a more global reach while allowing companies scared away by tighter U.S. regulations to list on the Euronext.
Why the NYSE and ICE?
According to the Wall Street Journal, this acquisition is all about derivatives. ICE has been looking for a European financial futures business to complement ICE's energy franchise. The merger would also allow ICE to better compete with its much larger rival, the CME Group Inc. (Nasdaq:CME) in both trading and clearing of over-the-counter derivatives.
SEE: Derivatives 101
The NYSE would benefit as well. With equity markets suffering from a general lack of interest since the 2009 financial crisis and growing markets for derivatives, the NYSE has lost relevance. Bloomberg reports that the NYSE has seen its share of trading in stocks listed on the American Stock Exchange decline from 82% down to 21%. ICE is the second-largest futures market and will combine that segment of the business with NYSE Euronext, owner of the biggest exchanges by value of listings in America, France and the Netherlands.
What Are the Regulatory Roadblocks?
This is not the first time the NYSE was almost sold off. In 2011, the NYSE tried to sell itself to Germany's Deutsche Börse AG, but European regulators pointed out that the proposed deal would give the combined company a near-monopoly in the European derivatives market.
This time around, it should be much easier. Since ICE does not have an existing interest in the U.S. cash trading market and the combined group's futures operations would equal only 10% of total volume, there is no such monopoly. The Wall Street Journal argues that while it is possible European regulators may once again balk at the idea, they are expected to approve the deal.
What Will the New Company Be Named?
Good question. The answer is that nobody knows and everybody is watching. New York has long been known as the financial capital of the world. Because of this, lawmakers such as Senator Charles E. Schumer do not want to see the NYSE name or its Wall Street trading floor go away. Schumer said, "I am also pleased they will keep the New York Stock Exchange name and protect the brand." According to CNBC, however, whether the NYSE name will be preserved is still up in the air.
What Do Shareholders Think?
ICE will pay $33.12 per share, a 38% premium over the closing price the day prior but some argue that it is not enough. The New Jersey Carpenters Pension Fund filed a complaint in the New York State Supreme Court alleging that the NYSE Euronext breached its duty to maximize returns for shareholders. The pension fund believes that the $33.12 per share significantly undervalues the company and is seeking to block the deal.
SEE: Keeping Track Of Retirement Plan Assets
In the filing, the pension fund contends that the sale was designed with "terms preferential to ICE" in order to benefit NYSE Euronext insiders. Other lawsuits, including one filed by an individual shareholder, Samuel Cohen, seek to make the suit a class action suit asserting some of the same allegations. Still, a few individuals don't speak for the entire investing community.
The Bottom Line
The NYSE Euronext seems intent on selling itself and this time, regulatory approval seems all but certain. All parties appear interested in preserving the name as well as the Wall Street location, but apart from that, what we know as the financial capital of the world may be rapidly losing its storied status.