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Cost Savings Delays Hit NYSE

Updated from 9:54 a.m. EST

Cost savings from acquisition-heavy NYSE Euronext (NYX) could be tripping up the big exchange operator.

Shares of the parent of the New York Stock Exchange plummeted 12% Tuesday due in part to investors' concerns after the company pushed back the timeline for when it expects to realize the full amount of cost savings from its technology initiatives through combining the NYSE and Euronext platforms.

NYSE said at the time of the deal, completed last April, that it expected to recognize $100 million in "revenue synergies" and $275 million in cost savings -- $250 million from technology savings -- by the first quarter of 2010. But while discussing its fourth-quarter and full-year earnings results on Tuesday, the company extended that time period for the technology cost savings to the fourth quarter of 2010.

NYSE blamed the pushback on a pre-existing Euronext joint venture with technology company Atos Origin called AtosEuronext Market Solutions, or AEMS. NYSE recently agreed to purchase the remaining 50% stake of the joint venture, which would give it ownership of certain Euronext cash and derivatives trading platform technology as well as third-party technology. The integration is expected to be completed in the third quarter, NYSE said.

"Compared to our previous estimates, we're seeing that by the first quarter of 2010, we'll have a $200 million run-rate savings, with the full $250 [million] coming at the end of 2010 and that's slightly smaller rollout in 2010 than we had expected," mostly due to the closing of the AEMS transaction and certain data center construction issues, co-COO Lawrence Leibowitz said during the call.

Investors weren't happy with the news. Shares dropped $9.93 to $72.80 on Tuesday.

"I believe management let the timetable for cutting costs slip," said one individual investor in an email, who is long NYSE shares. "Basically, [NYSE Euronext] is not doing what it said it would do, operationally. This is one reason the stock is getting hammered."

The deal with Euronext created the first transatlantic exchange titan. NYSE Euronext now encompasses six cash equities exchanges in five countries and six derivatives exchanges in six countries.

But integrating Euronext has not stopped NYSE from penetrating further into the exchange world. Last month it said it plans to acquire neighboring rival the American Stock Exchange for $260 million in stock. The Amex specializes in equities for smaller companies, as well as respectable options and exchange-traded fund businesses. It is one of the few exchanges that had yet to become a public company.

NYSE Euronext has also done several recent technology deals.

"The story here at the NYSE has become very much one of expense reductions," says Roger Freeman, an analyst at Lehman Brothers. "Investors are looking for evidence that merger synergies are coming through." Freeman has a buy rating on NYSE; Lehman is an adviser to NYSE on its acquisition of the American Stock Exchange.

Still Freeman says the selloff in the stock is overdone.

The fact that NYSE pushed out the synergies on the Euronext merger is a "slight negative ... certainly not one that justifies a ... selloff," he says. "[It suggests] that the full extent of the costs savings weren't priced into the shares to begin with."

"I think there has been some lingering doubts of the ability [for NYSE] to achieve the $250 million in technology cost savings," he adds, but after today's earnings conference call "our confidence has increased that they'll get there. They're being realistic with the timing."
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