NYSE Merger with Archipelago Holdings

     

On April 20th the NYSE announced that it would acquire Achipelago Holdings Inc., the

Chicago

operator of an electronic trading market.  Members of the NYSE, the owners of the exchange, are swapping their seats for cash and a seventy percent stock position in the surviving combined company.  NYSE seat prices have climbed fifty percent on the news and the shares of Archipelago have doubled in value (from over $16 a share to over $33 a share).  The current price of a NYSE seat is around $2.6 million;  in January seat prices were languishing at around $975,000. 

     This is a dramatic increase in value for both the buying and selling company in the acquisition and dwarfs the normal ten to fifteen percent total increase in value found in an average friendly acquisition.  What accounts for the market's unusual delight with the deal?

      First, the high post announcement values indicate that the market believes that the SEC will approve the deal and that the deal will close.  Second, the high values signal that the deal, post closing, will generate significant operating advantages.  Some advantage could be positive, such as operating efficiencies that reduce the costs of trading.  Other advantages could produce social costs, such as an increase in market power enabling the new NYSE to dominate rivals in its old market, listed shares, and in new  markets, Nasdaq listed shares and options on shares.  The market may be signaling that the country may end up with a single dominate, concentrated equity and options market, the NYSE, regulated as a public utility by the SEC -- an event that I view as ill-advised and most unfortunate.      

     In this regard the total share price increases on the Nasdaq/Instinet merger announcement do not match the market increases in the NYSE/Archipelago deal.  Nasdaq stock prices increased by fifty percent or so on the announcement of the merger but Instinet shares were offered a price that was lower that the last pre-announcement closing price (based on a argument that rumors had already run up the price).