NYSE Deal Threatened

A former board member of the NYSE announces his interest in buying the stock exchange, a move that could nix the NYSE-Archipelago deal that made he...
Stephen TaubApril 25, 2005

Within days of the announcement that the New York Stock Exchange would merger with Archipelago Holdings Inc., billionaire Kenneth Langone, a former board member of the NYSE, said he is considering entering a bid to buy the Big Board — effectively throwing a wrench into the landmark deal.

If he is successful, Langone would — in one fell swoop — disrupt the NYSE’s plan to go public, become a for-profit company and own one of the leading electronic securities markets.

Meanwhile, prior to Langone’s announcement, executives at The Nasdaq Stock Market Inc. said they would move to acquire Instinet Group Inc. for about $1.9 billion, a move that many observers say is a response to the NYSE-Archipelago deal.

According to reports, NYSE officials were hoping that the Archipelago deal would help the venerable exchange gain a foothold in the derivatives market, as well as facilitate the trading of shares listed on the Nasdaq, notes Bloomberg.

Langone is mulling a bid for the NYSE because he believes the deal to buy Archipelago is unfavorable for the NYSE’s 1,366 seat holders, who own the exchange, according to Bloomberg, citing an interview with Jim McCarthy, a spokesman for Langone.

Additionally, Langone is unhappy with the dominant role that Goldman, Sachs is playing in the transaction, according to various reports. The investment banking giant is a shareholder of Archipelago, owns a seat on the NYSE, and is acting as merger adviser on both sides of the deal.

Over the last year, top Goldman executives and the NYSE have been linked in the news. For example, in 2004, former Goldman president John Thain was named NYSE’s chief executive officer. Also, current Goldman CEO Henry Paulson played a major role in ousting former NYSE chief Dick Grasso, an old friend of Langone.

A Goldman spokesman, who was asked about Langone’s bid by the Wall Street Journal, characterized the announcement as “curious.”

Regarding the NASDAQ deal, officials at the exchange plans to combine operations with Instinet’s electronic-trading business, INET ECN. Before the merger is completed, NASDAQ expects to sell its Lynch, Jones & Ryan (LJR) subsidiary to Bank of New York (LJR specializes in institutional trading and research), and Instinet’s Institutional Broker division to Silver Lake Partners.

To finance the transaction, NASDAQ has obtained commitments for $750 million in 6-year senior term debt with JPMorgan and Merrill Lynch, which are acting as joint lead arrangers and joint bookrunners. In addition, NASDAQ has obtained a commitment for $205 million in convertible notes from buyout firms Hellman & Friedman LLC and Silver Lake Partners. The notes carry a coupon of 3.75 percent and will be convertible into NASDAQ stock at a price of $14.50 per share. Silver Lake Partners and Hellman & Friedman will also receive 1.56 million and 650,000 warrants, respectively, to purchase NASDAQ stock at a price of $14.50.

To facilitate the transaction, Hellman & Friedman also restructured the terms of NASDAQ’s existing $240 million convertible notes, extending the maturity date to May, 2012, lowering the interest coupon rate to 3.75 percent from 4 percent, and lowering the notes’ conversion price to $14.50 from $20.