NYSE, electronic rival to merge

Deal with Archipelago won't end floor trading

April 21, 2005|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

The New York Stock Exchange moved to the top ranks of electronic stock trading yesterday, announcing a merger with all-electronic rival Archipelago Holdings Inc. of Chicago that would end the NYSE's 212-year history as a not-for-profit membership organization.

The merger would combine the NYSE's traditional floor-based trading with Archipelago's electronic exchange.

John A. Thain, NYSE's chief executive officer, said the exchange needed Archipelago's help to grow but that the deal would not mean the end of the trading floor. Instead, he said, it would give investors added choices for trading stocks.

"The floor has real value," Thain told analysts during a conference call. "I think the floor will continue to add value. ... We'll let the market decide where they want to trade."

NYSE members would own 70 percent of the combined company, receiving stock in the new company and about $300,000 in cash per seat.

Archipelago stockholders would own 30 percent of the new company, which would be called NYSE Group Inc.

The New York Stock Exchange's regulatory functions would be separate in a not-for-profit entity, officials said.

Gerald D. Putnam, Archipelago's CEO, said the merger would result in "a unique and unparalleled marketplace."

Although NYSE Group would be based in New York, Putnam said the Archipelago subsidiary would maintain its primary presence in Chicago, where, he said, he would not expect any job losses.

Archipelago shares shot up late yesterday as rumors of the deal surfaced, closing up more than 11 percent at $18.76.

At that price, Archipelago's market capitalization is nearly $900 million. Based on the 30 percent figure for Archipelago shareholders, the combined company would be valued at roughly $3 billion.

SEC OK needed

The deal is subject to approval by the Securities and Exchange Commission and federal antitrust regulators, along with Archipelago shareholders and the NYSE's 1,366 members.

The two sides hope to close the merger by the fourth quarter this year or the first quarter next year.

Thain, who would be CEO of the combined firm, stressed the need to rejuvenate the NYSE as a motivating factor in the deal.

Although the exchange still handles nearly 80 percent of the volume in its listed stocks, it is under increasing competitive pressures from electronic markets around the world.

"We really needed new ways to grow," Thain said.

Eight-year-old Archipelago's entrepreneurial culture and management team "will help spur innovation at the New York Stock Exchange," Thain said.

The two companies had combined revenue of $1.42 billion last year. Officials said they can squeeze out $100 million in cost savings this year and in 2006, and $100 million more in 2007.

3 co-presidents

Putnam would be a co-president of the new company, along with current NYSE Presidents Catherine R. Kinney and Robert G. Britz.

The NYSE's 11 directors would be joined by three independent Archipelago directors on the combined company's board.

The move was greeted positively by some NYSE members, who had seen seat prices sink from more than $2.6 million in 1999 to less than $1 million in January. They have rebounded in recent weeks, selling at $1.62 million last week.

"I knew this is where they had to go. What surprises me is that they did it so quickly and in this format, but I'm pleasantly surprised," said seat-holder Thomas S. Caldwell, chairman of Caldwell Asset Management Inc. and a frequent critic of the NYSE, the Associated Press reported.

"I'm going to have to find someone else to fight."

In an interview, Putnam said he did not see a problem meshing the cultures of the staid NYSE and Archipelago.

`Want our culture'

"I wouldn't have done it if I saw any obstacles that would have stopped us from being successful," he said. "They want our culture to help the NYSE become ... more forward-thinking."

Putnam said the two companies began to talk in January. "We talked about whether it made sense ... and if this was feasible," he said. "The deal blossomed from there."

Chicago trader and money manager Jon Najarian of Najarian Capital Management sees benefits for both sides, with Archipelago shareholders gaining the prestige of the NYSE's name and the NYSE getting a technology boost.

"I think the NYSE needed a system badly. They didn't have something to pull out of the closet," he said.

A key benefit for Archipelago shareholders, Putnam said, is the NYSE's globally recognized name. Archipelago Holdings has been striving to build recognition for its ArcaEx name.

"This merger gets us far, far, far along - beyond anything we would be able to do alone," Putnam told analysts.

The Associated Press contributed to this article. The Chicago Tribune is a Tribune Publishing newspaper.

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