Nasdaq Buys Philadelphia Exchange for $652 Million
By Edgar Ortega
Nov. 7 (Bloomberg) -- Nasdaq Stock Market Inc., the all- electronic exchange that handles the most shares in the U.S., agreed to acquire the Philadelphia Stock Exchange for about $652 million in cash to enter the options business.
Gaining control of the Philadelphia market, the nation's oldest, would make Nasdaq the third-biggest exchange in the $1 trillion U.S. options industry, where trading is growing at the quickest pace in seven years. Chief Executive Officer Robert Greifeld has negotiated four other acquisitions this year, spurring a 62 percent rise in Nasdaq shares to an all-time high.
``They have arguably been the most acquisitive company in the exchange space,'' said Ed Ditmire, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller, who has an ``in line'' rating on Nasdaq. ``The company is definitely hustling to grow. Expanding into fast-growing and more profitable options trading is going to be viewed positively by investors.''
The acquisition will be completed in the first quarter of next year and will add to 2009 earnings, the companies said in a statement today. The deal was approved by both boards and requires further regulatory approvals.
Nasdaq rose 95 cents, or 2 percent, to $49.76 at 10:55 a.m. in New York trading. Earlier in the session it reached $50.47, the highest since the shares debuted in 2002. The FTSE/Mondo Visione Exchanges Index, which tracks 20 publicly traded exchanges, has risen 68 percent this year.
Tougher Competition
Competition has intensified as exchanges completed or announced about $39 billion of acquisitions and joint-ventures in 2007 as they seek to meet investor demand to trade securities and derivatives in one place. After leading NYSE Euronext through five deals in two years, CEO John Thain, 52, said in June he's considering ``all possible combinations'' to expand the company's U.S. derivatives business. A month later, the Chicago Mercantile Exchange completed the $11.3 billion purchase of the Chicago Board of Trade after fending off a rival bid.
Nasdaq had already planned to enter the options market this year by developing its own all-electronic trading system. The exchange told customers yesterday it planned to start matching options trades Dec. 7, pending approval by the U.S. Securities and Exchange Commission.
Daily options trading has increased 37 percent this year, compared with a 16 percent rise in the number of shares that change hands in the U.S., according to data from the Options Clearing Corp. and the New York Stock Exchange. Options are the right, without the obligation, to buy or sell an asset on a set date. The contracts can be used to hedge investments against a drop in prices, or magnify gains if the price of an asset rises.
`A Growing Market'
``Volumes are increasing and the retail public is becoming more and more aware of options,'' said Danny Rosenthal, co-chief executive of OptionsHouse Inc., a Chicago-based online broker. ``It's a growing market and they must see synergies with the work they are already doing in options. Philadelphia seems to have a pretty good trading platform and their pricing is aggressive.''
The Philadelphia exchange, which was founded in 1790, considered an initial public offering and alternative offers before deciding on the Nasdaq deal, Chairman Sandy Frucher told analysts today in the conference call. Goldman Sachs Group Inc. and Susquehanna International Group LLP, two of the largest U.S. options market-makers, had told officials at the Philadelphia exchange they may make an offer, people familiar with the matter said last month.
Market Share
The Philadelphia exchange pairs off about 14.8 percent of the roughly 11 million contracts that change hands daily in the U.S., according to Options Clearing. The exchange increased its market share last year after selling a controlling stake to six brokerages including Merrill Lynch & Co. and Morgan Stanley for a total of $33.8 million.
The deal with the brokerages included one-year incentives to send orders to the Philadelphia exchange, Frucher told analysts today. The exchange has since gained business based on its transaction fees and technology, he said.
``We earn our order flow and we earn it day in and day out,'' said Frucher, who will remain as chief executive of the Philadelphia exchange. ``We do it because of the market model we have.''
The Philadelphia exchange will be a unit of Nasdaq, with Frucher remaining chief executive officer, the companies said in the statement. Nasdaq will operate both its all-electronic system as well as the Philadelphia market's XL system that allows floor brokers to handle large orders.
`Comfort Level'
This year Nasdaq acquired the closely held Directors Desk to offer more online services to corporate boards. It also bought the Boston Stock Exchange for $61 million to expand equity trading and enter the transaction clearing business.
Nasdaq shareholders may vote as soon as next month on the $4.8 billion purchase of Stockholm-based OMX AB through a joint bid with Borse Dubai, according to a regulatory filing earlier this week. Nasdaq has also agreed to acquire a one-third stake in the Dubai International Financial Exchange for $50 million, the filing shows.
Greifeld, 50, had tried to expand overseas since March 2006, failing twice to buy London Stock Exchange Plc. Nasdaq's sale of its 31 percent stake in the London bourse helped boost third- quarter profit 12-fold to a record $365 million.
``We clearly are taking upon ourselves a significant workload with respect to Boston, Philly, and OMX,'' Greifeld told reporters today. ``But it's within our core competencies and within our comfort level.''
To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net .
Last Updated: November 7, 2007 11:06 EST |
