NEW YORK ( The Deal) -- The NYSE Euronext ( NYX) merger with IntercontinentalExchange ( ICE), 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.
Portales Partners analyst Paul Gulberg said the deal was on track and would be earnings accretive for ICE, noting NYSE's derivatives Liffe platform would have been the primary asset of interest. "U.S. equity markets are extremely commoditized but ICE has said they'd consider listing or selling the cash equity business," he said. UBS research analyst Alex Kramm said ICE's stock outperformance reflected greater confidence that synergy targets would be met. "ICE remains our favorite idea in the exchange subsector and we expect the stock to move higher as investors give more credit to the significant earnings accretion expected from the deal," he told clients. ICE chief executive and chairman Jeff Sprecher said Tuesday on a conference call discussing the exchange's second-quarter earnings that since receiving antitrust approvals, the group had exchanged information far more closely with NYSE Euronext, giving the acquirer renewed confidence that projected cost savings would be realized. ICE reported second-quarter net income of $153.3 million, or $2.09 per share, up 7% from net income of $143.2 million, or $1.95 per share. Sprecher said both companies had discussed the organization of a global equity index business. "A meaningful group of equity indices on a common platform are likely to drive growth," he said. Hintz said the expected spinoff or disposal of the Euronext cash equity business as part of the deal would reduce the new company's reliance on cash equity trading to around 5%. Once completed, this would make the economics of the deal clearer, with ICE then able to lower its average cost per trade through higher volumes and the removal of back-office costs, he said. The combined ICE-NYSE Euronext would be the third-largest exchange globally behind Hong Kong Exchanges and Clearing and CME Group ( CME). NYSE was recently appointed the administrator of Libor, a key benchmark rate that has been tarred by several rate-rigging scandals and was once symbolic of London's rise as a global financial center. Written by Jane Searle.