Putting Your Capital on ICE

NEW YORK (TheStreet) -- When a smaller company takes over a larger company the synergies can be exponential.

That's exactly what I'm anticipating when IntercontinentalExchange ( ICE) completes its acquisition of NYSE Euronext ( NYX) sometime in the second half of this year.

Earlier Tuesday, NYX reported fourth-quarter earnings that beat analyst estimates after the company cut costs. Net income fell 75% to $28 million from $110 million a year earlier, the New York-based company said in a statement. Yet, these results don't really matter as they normally would.

That's because the price of NYX shares are tied to ICE, which reports Wednesday. The analyst consensus for ICE is a drop of 1 cent per share in quarterly year-over-year earnings and a 1.6% drop in revenue. That said, the mantra on the Street is "ICE is nice because ICE is twice," meaning its impending acquisition of NYX and all its plans and benefits.

One of those benefits will include the growing value of NYX between now and when ICE completes the takeover. In a Jan. 24 interview with the Wall Street Journal, NYX CEO Duncan Niederauer revealed plans to spin off its Euronext division.

Euronext is the European electronic stock-exchange business that operates markets in Paris, Amsterdam, Brussels and Lisbon. The spinoff was outlined as part of the $8.2 billion transaction announced last month between ICE and NYX. The spinoff has an important goal.

It will, according to the newspaper, help to "...allay potential concerns that exchanges managed from afar could diminish the influence of European financial hubs, hurting their ability to control jobs and other aspects of the business."

During its conference call, NYX reiterated something first mentioned in a Jan. 31 Wall Street Journal article, that a side deal NYX reached with ICE could prevent a competing bid from arising.

Under the deal, NYSE's European derivatives unit, known as Liffe, agreed to clear its trades through IntercontinentalExchange for at least two years, the newspaper reported, citing unnamed sources. The deal will remain valid regardless of whether the merger with IntercontinentalExchange closes.

The Euronext spinoff has whet the appetite of rivals including Nasdaq OMX ( NDAQ), which have made some informal inquiries about buying Euronext. The Journal article quoted Nasdaq CEO Robert Griefeld that he'd like to examine Euronext if it were put up for sale.

You're beginning to catch my drift. When a shareholder buys shares of either NYX or ICE they're getting, in essence, the benefits of all the lucrative parts of both companies. Let's take a look at how the stock prices of each have fared in the past year. NYX Chart NYX data by YCharts

Both companies have had a lovely ride, especially in the last couple of months as the good news about the purchase of the bigger company by the smaller company has caused shares to percolate. Now let's look at the "kicker" that may especially benefit shareholders of NYX.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

NYX has estimated its Euronext business has created close to $560 million in revenue in the 12 months ending Sept. 30. NYX is cutting costs and the company also plans to refinance its debt, saving $15 million this year and $24 million in 2014, CFO Michael Geltzeiler said on the company's earnings call.

The Euronext side of NYX's business has an approximate pretax operating margin of 25%. So the "kicker" is to launch an initial public offering of Euronext sometime after the closing of the ICE purchase. The value of the Euronext business could be as high as $1.39 billion. Shareholders of NYX would eventually receive an undisclosed number of shares of Euronext in this scenario. Details are still pending.

During the earnings call NYX's Niederauer stated, "We certainly see further upside for investors from revenue synergies. Any IPO of Euronext would occur as soon after the close as practical, but as you would expect our focus right now is on the approval process for the merger."

Niederauer will be president of the combined company after the merger. Neither he nor the CFO said anything about changing the dividend payout of NYX, which currently has a yield-to-price of 3.41%. Shareholders will be reaping a sweet reward while they wait for what's ahead for both NYX and ICE.

From this analyst's perspective, the way to play this news is to buy some shares of NYX on any pullback. Since the news on NYX's intention to spin off Euronext in an IPO, shares have traded as low as $33.36. That's where I'm placing a buy-limit order and I encourage you to choose a limit price that suits you.

Wednesday's earnings report by ICE may offer some surprises for investors and more insight into how the future will unfold as this company becomes a powerhouse in the world of investments. Speculators may want to begin accumulating shares after ICE spills its beans and demonstrates why "ICE is nice"!

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Make smarter trading decisions and provide investment ideas that could help make you richer. Bryan Ashenberg does the dirty work so you don't have to!

More from Opinion

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Throwback Thursday: Intel Edition

Throwback Thursday: Intel Edition

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook