A Behemoth Market Operator in the Making

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Merger and acquisitions talks between major exchange makers have been brewing for a while now, but we may now finally have a deal on the table. It was announced this week that IntercontinentalExchange, or ICE (NYSE: ICE), has made a bid for NYSE Euronext (NYSE: NYX), which is likely to gain regulatory approval. The deal, which is one of the largest in the stock exchange space since NYSE merged with Euronext, will create a global trading powerhouse that may alter the nature of the industry.

Terms of the Deal

ICE is one of the world’s largest platforms for futures, derivatives and OTC markets trading. NYSE Euronext, on the other hand, is the world’s most venerable equity and equity options exchanges. ICE has made a bid for NYSE of around $8.2 billion, which was unanimously accepted by the boards of both companies. This comes down to $33.12 per share for the two-century-old New York institution, representing a premium of roughly 37% to Wednesday’s close price. The news sent NYSE’s stock soaring over 30%. About a third of the deal will be transacted in cash, and the rest in stock consideration. ICE has mentioned they may plan to float the Euronext division of the company if “market conditions permit.”

Expected Consequences

The merger of these two companies is set to create the world’s leading global exchange operator in a tremendously diversified range of markets. These include agricultural and energy commodities, credit derivatives, equities, and Forex, among others. According to management, the merger has a number of direct advantages. Firstly, the deal will lead to significant merger-related cost synergies. Also, the deal should aid earnings after the first year and produce returns on capital in year two.

Furthermore, the deal will allow ICE to further diversify its range of asset classes. Clearly, the deal will benefit both companies in terms of scale advantages. However, I must admit to being somewhat skeptical about so much market operating power being centered in one company. While this does not yet represent a monopoly, the combined trading platform will be very, very large.

Fundamentals and Valuations

Let’s take a look at some of the metrics for ICE. ICE trades at 17.85x earnings, which is at a bit of premium to the investment services industry. The price to book is quite reasonable though at about 2.61. The operating margin is a staggering 61.5% and return on equity is decent approaching 17%. Total debt to equity is about 23.6, quite doable. With a beta of .85, the stock is slightly less volatile than the overall market.

Bottom Line

The merger between ICE and NYSE Euronext is set to create the world’s premier market operator. Whether or not this is good for global trading remains to be seen, but one can be fairly certain that the deal will benefit both companies. Aside from delivering a number of scale advantages, the deal will allow ICE to enter a number of new asset categories. It will be interesting to see how the creation of this global trading giant affects the industry.


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend NYSE Euronext. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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