NEW YORK — Life isn’t fair.
Just ask John Thain.
Since becoming chief executive of the New York Stock Exchange in 2004, he has taken the former membership organization public, pushed it into bond and option trading, and merged it with Euronext NV of Amsterdam, Netherlands, Europe’s largest exchange group. Now he is being slammed by shareholders.
NEW YORK — Life isn’t fair.
Just ask John Thain.
Since becoming chief executive of the New York Stock Exchange in 2004, he has taken the former membership organization public, pushed it into bond and option trading, and merged it with Euronext NV of Amsterdam, Netherlands, Europe’s largest exchange group. Now he is being slammed by shareholders.
They have dumped shares of NYSE Euronext Inc. of New York, driving the price down by more than 20% year-to-date as of Friday.
Looming behind this seeming disconnect is a wall of worry about the company’s future. A bumper crop of rival exchanges are squeezing market share and profit margins of NYSE Euronext’s core stock-trading business.
Meanwhile, the hefty price tags of futures exchanges — one of which Mr. Thain admits he must buy to drive growth — have investors running scared.
“John is an aggressive buyer,” said Thomas Caldwell, chairman of Caldwell Asset Management Inc. of New York and one of NYSE Euronext’s largest stockholders, with about 4 million shares. “The fear is, he might be really aggressive when valuations for other exchanges are so robust.”
Mr. Thain’s problems begin with the exchange’s fast-eroding market share in its largest business, stock trading. In recent years, the NYSE’s huge share has come under attack by such longtime rivals as The Nasdaq Stock Market Inc. in New York and even upstarts such as BATS Trading Inc., a two-year-old trading network in Kansas City, Mo.
As a result, the NYSE’s share of trading listed securities has plummeted to about 64%, from about 80% just two years ago, according to New York investment banking boutique Sandler O’Neill + Partners LP.
Eroding profit margins
Profit margins also are eroding, largely because competitors such as Nasdaq and BATS are offering to trade NYSE-listed stocks for little or no charge. NYSE prices on electronic trades remain double or triple the cost of those on Nasdaq, according to New York-based Lehman Brothers Holdings Inc., and that may leave Mr. Thain no choice but to cut his prices.
Matters will likely only get worse. In November, European marketplaces will open up to more of the sort of competition that has become standard in the United States.
“I’ve got to assume there is going to be more pressure on the NYSE’s revenue as a result,” said Larry Tabb, chief executive of TABB Group, a Westborough, Mass.-based financial technology consulting firm.
To Mr. Thain, the way out of this morass is clear: Snap up a futures exchange such as NYMEX Holdings Inc. of New York or IntercontinentalExchange Inc. of Atlanta.
The attraction is also clear. Those businesses are growing faster and are vastly more profitable than stock trading.
“For us to get a significant position in the U.S. futures business, I think we have to acquire something,” Mr. Thain told analysts last month.
The trouble is, his company’s stock isn’t worth nearly as much as those of his potential targets. Shares of NYMEX and ICE shares fetch nearly 50 times expected earnings, while NYSE Euronext shares trade at a multiple of just 32.
“It wouldn’t fly with our shareholders if we accepted the NYSE’s stock, considering how much lower their multiple is than ours,” said an ICE official, who asked not to be identified, adding that there are no formal talks under way between the parties.
NYSE Euronext and NYMEX declined to comment.
The price of such acquisitions could be murderous. Deutsche Bank AG of Frankfurt, Germany, estimated in a recent report that NYSE Euronext would have to pay as much as $14.5 billion for NYMEX and $13 billion for ICE.
Either would be a huge pill to swallow, considering that NYSE Euronext’s own market value is just $21 billion. A purchase such as that would cut earnings per share by an estimated 7%.
“Thain is stuck between a rock and a hard place,” said Thomas Catino, managing member at independent research firm Ant & Sons LLC in Stamford, Conn. “But in the long run, this is a move he will have to take, and the backlash from the Street will be even worse if he doesn’t.”
Of course, Mr. Thain still has a few aces up his sleeve. He would bring to any futures exchange a premiere brand and a powerful business listing the shares of new companies.
CBOE bid?
At midyear, NYSE Euronext had listed about $15 billion worth of newly public stocks — $5 billion more than Nasdaq — according to research firm Dealogic LLC of New York.
One alternative would be a bid for the Chicago Board Options Exchange, the nation’s largest options marketplace. But there, too, price would be an issue, as the market would probably fetch a significantly higher price than the International Securities Exchange Inc. of New York, the nation’s second-largest options market.
The ISE recently agreed to be bought for $2.8 billion, a whopping 50% premium over its market price.
While Mr. Thain tries to figure his next move, shareholders are heading for the exits.
They include Brian Summers, a managing director at Thornburg Investment Management Inc. in Santa Fe, N.M., which has reduced its stake to 700,000 shares, from 2.5 million a year ago.
“What’s the earning power going to be for this company a couple of years from now?” he asked. “No one knows.”
CNS
