March 7, 2006 will mark the end of a 213 year old tradition, but it will also be the start of new era. If
all goes according to schedule, tomorrow the New York Stock Exchange
(NYSE) will complete a merger with Archipelago Holdings Inc. (Arca). [1] The
merger will create a new publicly held corporation, NYSE Group Inc.
(stock symbol: NYX) making the NYSE a for-profit public company. [2] The
merger has been a long time in the making and is not only significant
for the Big Board, but is also a major milestone in the corporate world
as once again new standards have been set. [3] The
transaction will give the NYSE, already the world’s biggest exchange,
high tech trading capabilities and 49% of the stock trading market. [4]
The Old NYSE
It was less than three years ago that the future of the NYSE seemed grim. In
2003 the NYSE was heavily criticized over the scandal involving
excessive compensation for former Chairman and CEO Richard Grasso. [5] The scandal called into question the ability of the exchange to regulate itself. [6] Although the importance of the NYSE to market systems is recognized, there was no doubt the exchange was in big trouble. [7]
The merger has not been without hurdles or opposition. The new NYSE completely goes against the legacy culture of the exchange. And
while the merger has great growth opportunities, NYSE CEO John Thain,
has had an uphill battle to convince some that the NYSE needed a change
in order to survive in a changing marketplace where the NYSE market
share was slipping. [8] Upon announcement of the merger ten NYSE members led by William Higgins, filed a suit against the NYSE. The suit claimed that the NYSE was overpaying as the deal requires NYSE to give 30% of the new corporation to Archipelago. [9] However, this suit was finally settled for $12.6M last Tuesday February 21, 2006. [10]
Last
year the deal was approved by the Justice Department, NYSE seat owners
and Archipelago shareholders. [11] However, it was not until Monday
February 27, 2006 that the SEC finally gave regulatory approval to the
merger. [12] In getting to the merger, the SEC has had to approve
several rule changes. [13] “The (SEC) has worked
with the NYSE…to adopt changes in the proposed regulatory structure for
the combined entity that will increase the independence of regulation
and oversight.” said Christopher Cox, SEC Chairman [14]
As
part of the changes to agreed to by the NYSE a majority of the
exchange’s board and the board’s committees must be completely
independent of management. [15] However, there
are still concerns about SROs and those will continue far past the
completion of this merger. NYSE is working toward “harmonization” with
other self-regulatory organizations (SROs) especially NASD which has
considerably more age and experience than NYSE Regulation. [16] The
NYSE has invited the SEC to be involved with its continuing discussion
with NASD. However, the NYSE and NASD have not come to an agreement on when or how to effectuate a “cooperative relationship.” [17]
The New NYSE
Now as the NYSE sits on the verge of merger, the 213 year old exchange’s future looks quite promising. [18] This
approach mirrors the Chicago Mercantile Exchange (CME) which converted
to an electronic trading system a few years ago when it also changed
from a private to public company. [19] In fact, the former CME CEO, James McNulty has been named a NYSE director. [20]
The $7 billion deal will make the exchange and Archipelago wholly owned subsidiaries of the NYSE Group. [21] Upon
completion the NYSE’s 1366 seats will become shareholders with the
initial batch of stock being distributed to NYSE seat holders and
Archipelago staff per the merger agreement. [22] NYSE will hold 70% of the company with Archipelago holding the remaining 30%. [23] Soon after outside investors will be able to buy the NYSE Group stock through a secondary public offering. [24] The offering is expected to occur in March or April. [25]
Four underwriters have been named for the share offering: Merrill Lynch
& Co., Morgan Stanley, J.P. Morgan Chase and Co., and Lehman
Brothers. [26] The selection of the
underwriters, with none named as the managing underwriter, suggests the
exchange wants to spread the opportunity for the high- profile stock
across the industry. [27] The secondary offering could raise up to $2 billion. [28]
The
merger increases the abilities of the exchange and gives it the
potential to eventually become a “one-stop shop where investors can buy
global stocks, futures, options, exchange-traded funds, and bonds.” [29] With Archipelago, the exchange now has a much broader mix of products than it did by itself. [30] “The deal also increases the exchange’s market share in exchange-traded funds and derivatives trading.” [31]
Increased
competitiveness with electronic rivals such as NASDAQ is also a benefit
of the merger as traders have been drawn toward faster transaction
speeds which the NYSE, with its floor auction system of human traders
could not produce. [32] Additionally, the new
company will be able to trade stock listed on the NYSE, NASDAQ and over
the counter stocks thanks to the Archipelago electronic trading system.
[33] As John Thain said, “This will mark the beginning of a new era for the exchange and Americas financial markets.” The new exchange “will be better positioned to grow, create value, and compete globally.” [34]
[1] Joseph Webber, From Dinosaur to Dynamo?, Business Week, Mar. 6, 2006, at 70.
[2] Marcy Gordon, SEC approves merger of NYSE and Archipelago (Feb. 28, 2006), http://news.findlaw.com/ap/o/51/02-28-2006/a027001a1bf67c1b.html.
[3] NYSE Merger gets Final Go-Ahead, Chicago Tribune, Feb. 28, 2006, at C-3.
[4] Id.
[5] Webber, supra note 1.
[6] Gordon, supra note 2 (exchanges are responsible for policing their traders and the SEC oversees the exchanges).
[7] Webber, supra
note 1. See Jeffery Kutler, Self-Regulatory Pendulum, Security Industry
News (Feb 20, 2006) for a critique of the NYSE self-regulatory structure
[8] Id.
[9] NYSE: Suit Settlement OK Clears Merger Path, Chicago Tribune, Feb. 22, 2006, at C-2.
[10] Id.
($9.1M went to lawyers representing the group of exchange member who
were critical of the deal and $3.5M was the amount that Citigroup Inc.
arrived at in evaluating the deal).
[11] Gordon, supra note 2.
[12] Id.
[13] Self-Regulatory Organizations – Approval of Proposed Rules Changes, SEC News Digest, Mar. 1, 2006. See also Press Release, SEC, Approval of SRO Rule Change Necessary to Effectuate Merger of NYSE and Archipelago Holdings (Feb 27, 2006) available at http://www.sec.gov/news/press/2006-29.htm. (Rules available at http://www.sec.gov/rules/sro/nyse/34-53382.pdf and http://www.sec.gov/rules/sro/pcx/34-53383.pdf.).
[14] Gordon, supra note 2.
[15] SEC Press release; Gordon, supra note 2. [16] G
[17] Id.
[18] Webber, supra note 1.
[19] Id.
[20] Id.
[21] Webber, supra note 1; Aaron Lucchetti, NYSE Taps Four Lead Underwriters for its Share Offering, The New York Sun, Mar. 2, 2006, at 12.
[22] Webber, supra note 1; Lucchetti, supra note 21.
[23] Lucchetti, supra note 21.
[24] Webber, supra note 1. [25] A
[26] Id.
[27] Id.
[28] Id.
[29] Webber, supra note 1.
[30] Big Man at the Big Board, Business Week Online, (Feb 28, 2006), http://www.businessweek.com/magazine/content/06_10/b3974092.htm.
[31] Gordon, supra note 2.
[32] Id.
[33] Id.
[34] Id.