Your Adarsh™

Letz mint some ‘ka-ching’

*Speculation on NYSE’s stock price post acquisition.

The market has been on a spree on the M/A activity. Many speculations, many rumors running through the whole market. One of those comes from the Exchanges sector.

New York Stock Exchange acquired Euronext lately and has been on a tear DOWN in the stock price since early this year. It seems to have found the bottom at around $73, nearly a 30% drop from it’s year high. The lower stock prices, bullish comments from some street gurus and analysts, and a smooth integration news with record trade volumes on the merged NYSE-EUR (NYX) gave the stock a little squeeze and boost since the last fortnight. We have speculation going on here with Thain looking to dig into futures.

This lets traders speculate on the stock price going forward. Many opine that paying a premium actually diminishes the acquirers value in stock price. but is it always true? Here is my opinion. Please feel free to comment.

Paying a premium doesn’t matter. Acquisitions automatically involve premiums. It is kinda intrinsic. Can you recall an acquisition without any premium. If the market now values NYX at 83…that will be taking into consideration that we’ll be paying to NMX or ICE or whatever for that matter. We do not have debt at all. In fact we have cash. It is no wrong that we use that for an acquisition. There may be a slight drop in the stock price but that shouldn’t be big.
Can you recall any analyst or any body from a big firm saying that an acquisition will be a negative? It was just individual investors speculaing that there would be a drop to 65’s 60’s etc. I don’t say that we won’t have a drop. But that won’t be a 10-15%. We are not going to drop back to those 75 levels, IF we acquire. May be we’ll drop if the fundas change. The street just recognised what it has been doing with NYX, after it watched CME-BOT merger.
Let us see it with the earnings :
If we acquire NMX :
Our 2008 EPS would be :
NYX – $3.37 (which will be revised more than once in my view after analysts recognise what exactly Euronext brings to NYSE)
NMX – $3.65
The total would be more than $7.
Give it a P/E of 30. What do we have here ? A stock at 210.
But let me tell you that not one exchange is trading at a P/E of 30 now. The lowest is 33 and the highest I could find was around 65.
Take the average and apply that for NYX (for sure I think we’ll have a name change ;) 49 P/E would give us 49 * 7 $301 by the end of 2008.
If we acquire ICE our earnings in 2008 would be ICE – 4.93
Total EPS 8.4
A P/E of 30 places us at $252 and a P/E of 40 places us at $336. Don’t even calculate where the 49 P/E would take us !
That’s consolidation.
All these prices take in that we go through the consolidation without any hiccups. This is only true if the integrations go smooth.
Note: All EPS estimates are taken from BOA Investment Services as of 7/13/2007.

Hope this helps.
Your Adarsh


July 13, 2007 - Posted by | Blogroll

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