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The Deal: ICE-NYSE Unexpected Merger Success

NEW YORK ( The Deal) -- The NYSE Euronext (NYX) merger with IntercontinentalExchange (ICE - Get Report), popularly known as ICE, is progressing faster than expected, convincing skeptics on the merits of a marriage for the staid NYSE as its traditional business erodes and its shares remain below precrisis levels.

Uncertainty around global regulation has largely put the brakes on exchange mergers, though the pressure to consolidate remains.

Cash-equity trading revenues and floats are plummeting as global bourses increasingly look to derivative products for growth. Analysts say the NYSE's share of cash execution has fallen to 25% of stock market volume from about 80% a decade ago, with few barriers to entry for new equity trading platforms.

Recent mergers show awareness of the trend: The Tokyo Stock Exchange -- once a key venue for foreign company listings -- combined its cash equities business with the growing derivatives platform of the Osaka Securities Exchange through a merger in January. The merger was described as a defensive, given Tokyo now lags several Asian centers as a destination for offshore listings.

Similarly, critics have welcomed the merger of the NYSE and Atlanta-based ICE -- the latter specializing in commodities derivatives -- in a deal expected to create one of the largest derivatives exchanges by contracts traded. ICE's acquisition of NYSE Euronext for $33.12 per share in stock and cash was announced in December, causing NYSE shares to jump 34% on the day. The $8.2 billion deal received unconditional approval from the European Commission in June.

Sanford C. Bernstein equity research analyst Brad Hintz noted that two generations of Wall Street "star managers" had attempted to turn the NYSE around and failed. The catch for any buyer, he said, was that they couldn't shut down the NYSE given its status as a cultural icon.

But Hintz said his skepticism on the merger appeared to have been wrong. "ICE Clear Europe and NYSE Liffe completed the very complex transition of clearing, from the derivatives market of NYSE Liffe to the ICE Clear Europe platform, which increases our confidence in the ICE team's ability to address the operational challenges ahead," he told clients.

Hintz said history suggested exchange consolidations could yield a 30% cost reduction, with $450 million in projected costs savings for the deal likely to be reached.
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