Financial exchanges' market: another milestone

Financial exchanges’ market: another milestone

Today represents somewhat of a milestone in the history of public listing of stock exchanges: New York Stock Exchange is going public. It may be the last but it is certainly not the least. The expectations is that the combination NYSE – Archipelago Holdings will be valued at about 10 $billion, which will the biggest equity marketplace in the world below both Chicago Mercantile Exchange and Deutsche Borse (DBAG) but high above Euronext, Nasdaq and LSE. The table below shows the market capitalisation of quoted major exchanges and their relative valuation (as expressed by P/E ratio)

Quoted Financial Exchanges: market data

(as of March 6, 2006 COB in euros)

aaaaaaaaaaa CME AX NDAQ Euronext DBAG LSE OMX

Market Cap 12285 2641 2998 6112 10904 3218 1694

P/E Ratio 48.6 74.58 70.11 42.42 25.74 37.38 29.16

The most highly valued exchange in absolute terms is the CME. One assumes therefore that the market puts a premium on derivatives rather than on straight equity markets. This is apparently confirmed by the high valuation of DBAG. However, this is only a partial corroboration as DBAG’s derivatives segment, Eurex, is actually bigger than that of CME. Come to think of it, Euronext also has a sizable and flourishing derivatives business, LIFFE. The current market ranking suggests that those businesses are undervalued, relative to CME. This may reflect a degree of scepticism about the willingness of the management of Euronext and DBAG to maximise shareholder value. It also creates what fund managers see as an arbitrage opportunity. On Monday March 6, Financial Times published an article on the “Hedge fund’s love affair with exchanges.” Among reasons for their interest, the article lists the uncertainty about proper valuation, which creates a potential upside.” As we know, some fund managers were not content to wait patiently for such upside but took active steps to make it happen. They were instrumental in torpedoing a potential merger between DBAG and London Stock Exchange and bringing about top management changes in DBAG. At present, they appear to favour a combination between DBAG and Euronext. This is not an easy proposition. Current market valuation suggests a takeover rather than a merger of equals. Politically, this may not be acceptable to the Euronext shareholders and, even more, to its overseers. Furthermore, it would require major business restructuring, concerning both the clearing and derivatives businesses. I am sure that some managers and their advisers are exploring the idea of splitting those businesses and floating them separately.
The arrival of NYSE is going to make the life of exchanges even more interesting. Many observers believe that the NYSE cannot remain as it is and its flotation, by creates an acquisition currency, is a necessary stage in the process of its continuing transformation. Logically, the process should next unfold in the US market but one cannot rule a transatlantic move.