Diane Francis on Business Issues

Saturday, June 03, 2006

Taking on the Big Board

Diane francis column Wednesday Post May 31

NEW YORK CITY - Bay Street maverick Tom Caldwell roughly made his clients C$100 million in profit accumulating seats on the Big Board before it went public this year. But it was a hard-fought battle which pitted Caldwell against the old boys' network which calls itself the New York Stock Exchange.

Now, just weeks after celebrating, (he bought himself a pick-up truck), he finds himself disgruntled again with the New York Stock Exchange management and its board of directors because they have gotten caught up in a trans-Atlantic stock exchange merger fever.

Last week, the NYSE made a US$10.22-billion merger offer with Euronext NV, which runs the smallish Paris, Brussels, Amsterdam and Lisbon Stock Exchanges.

"The timing is not right and the price is not right," said Tom in a telephone interview. "There's not enough industry experience on the NYSE board. It's the same management and there seems to be little understanding of the incredible asset they have which they haven't capitalized on as yet."

By the way, NYSE boards have been mostly populated by members of the old boys' network, former politicians or celebrities. Even Martha Stewart was on the board despite the fact her company was listed. Many of its traders are under investigation as is its former CEO, Dick Grasso, for getting a retirement payout of US$139.2 million.

These days, Tom Caldwell and his clients are the third largest shareholders (with about 3%) in the widely held public company, called NYSE Group Inc. If given a chance to vote on the merger with Euronext, which isn't the case so far, he said he would oppose.

"I would vote no, with the caveat that I've been wrong before," he said. In 1998, he opposed the conversion of the Toronto Stock Exchange into a public company, but admits his mistake. "Those [Toronto] seats went from C$50,000 to C$31 million. It was the deal of a lifetime. And that exchange is really well-managed."

Now a profit-seeking public entity, Toronto's margins are 50% compared with the fledgling public entity in New York with margins of only 3.4%.

That's why a merger is premature because valuations aren't based on realizable margins, he said. After the Toronto home run, Tom searched the globe for exchange investment prospects and first zeroed in on New York. In August 2003, he bought the first seat for a record price of US$2 million, then led the charge to take that exchange public.

During that time, compensation (Grasso's) and trading scandals dogged the place, plunging the value of seats to as low as US$975,000 in early 2005 but the Caldwell group kept acquiring.

"Toronto and London had already gone this route and it was proven," he said. "It was amazing how many people did not see this. A little guy from Toronto shouldn't have been able to go into the heart of capitalism and in 18 months change it. But Wall Street is extremely parochial, full of pride and hubris. They feel that if something does not happen there, it hasn't happened."

The current exchange takeover fever began to spread in 2004 when Germany's Deutsche Borse bid for the London Stock Exchange. Rebuffed, Deutsche then bid this year for Euronext only to be rejected last week in favor of the NYSE offer. In the meantime, NASDAQ approached London, was rejected but has 24% of its stock, an expensive proposition given that it has no access to LSE cash flow. Deutsche Borse operates the Frankfurt and Eurex derivatives exchanges.

The NYSE's pursuit of Euronext frustrates Tom because it took him months and great effort to convince the sleepy NYSE board, management and members to convert seats into shares and go public, only to find that the same sleepy management is now jumping prematurely on a buyout strategy.

"The NYSE is not far enough along in its own development to be doing a merger. The stock is undervalued because management has not realized efficiencies," he said. "This is taking a great asset and reducing it to a good asset."

The NYSE Group Inc. has been talking with the Chicago Mercantile Exchange Holdings Inc. and the company should be pursuing this plus other strategies like regional consolidation and maximization of profitability, he believes.

"I would also like to see this exchange lobby Washington to ease up on the more onerous parts of Sarbanes Oxley, one of the underlying root causes for these cross-border transactions," he said.

Cultural differences will also make matters difficult, he said. "Brussels must approve the deal and is busy trying to regulate the size of bananas. Then there's Paris which thinks its exchange is the center of the universe and then there's the business culture in France where a deal generally lasts as long as you're shaking hands and sitting in the same room."

Caldwell's clients have holdings in Hong Kong, Johannesburg, London, Osaka, Toronto, the Chicago Board Options Exchange and the International Stock Exchange.

"Exchanges are like buying toll roads," he said. "We like them."

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