Archipelago Buys a Relic
Friday January 7, 10:18 am ET
By Tom Taulli
Before the age of mass telecommunications, regional stock exchanges served a crucial need, especially as the U.S. expanded westward. The Pacific Stock Exchange was one of them. It was founded in 1862, more than a decade before the telephone was invented.
In the Internet era, regional stock exchanges are becoming museum items, although many still do enough business to make them appealing acquisition targets. This week, for example, Archipelago Holdings (NYSE: AX - News), purveyor of an all-electronic stock exchange, purchased the PSE for roughly $50 million -- 20% of which will be funded with Archipelago stock, and the remainder with cash.
Founded in January 1997, Archipelago is a product of the electronic age. It was one of the first electronic communications networks -- entities that are popular among institutional traders because they allow for electronic trading of securities, often after the major exchanges close.
The PSE and Archipelago have been strategic partners for several years, so I wouldn't expect integration to be a problem.
Archipelago's primary focus is in Nasdaq equities trading. However, with the PSE, Archipelago will expand significantly into the options marketplace, which is growing at a rapid clip -- the PSE is ranked No. 5 in options trading. The deal, however, is not expected to be accretive until 2006.
Archipelago went public last August at $11.50 per share; the stock is now at $20. And the PSE acquisition will likely not be the company's last transaction. It could buy another regional exchange, such as the Philadelphia Stock Exchange. Or it may get even more aggressive and purchase Instinet Group (Nasdaq: INGP - News), whose majority shareholder, Reuters (Nasdaq: RTRSY - News), recently hired an investment bank to explore the possibility of selling.
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