Boom Times for the Big Board?

Investors begin to wonder if the NYSE's share price is poised to soar amid industry consolidation, cost cuts, and electronic trading

by Joseph Weber

Call it the Cramer effect. After CNBC telejournalist Jim Cramer advised viewers that shares of the New York Stock Exchange's parent company could handily reach $250 in the next couple years, the stock climbed 7.9%, closing at $94.48 on Nov. 10, a new high.

But can the surge last? Certainly it's risky to bet against Chief Executive Officer John A. Thain, the MIT-trained Goldman Sachs (GS) veteran leading NYSE Group (NYX), and the crackerjack management team he has assembled, many from the Archipelago exchange Thain merged into the NYSE.

By ending the archaic membership structure, taking the outfit public, and modernizing trading to the point of closing some of the trading-floor space in just the past year, the NYSE team has proved it can get things done. And yet, Thain has a lot of ground to cover in the next few months to justify the sharp incline the stock has been on since last summer, when it dipped slightly below $50 a share.

Next Up: Euronext?

The biggest hurdle between $94 and $250 a share, or whatever is the appropriate price in a couple years, is Thain's ambitious plan to acquire Euronext, the European bourse. Euronext's leaders are onboard, but persuading shareholders and—perhaps more important—European politicians that it's a good deal is a huge challenge. Rivals at Deutsche Börse, the German-Swiss exchange, are still trying to woo Euronext away, and their appeal to European nationalism is potent.

The question of whether Euronext will help Thain make the NYSE a true global powerhouse will likely get resolved in short order, though. He'd like to have shareholders of both exchanges consider the deal by the end of this year and, if they agree with it, close it in the first quarter of 2007.

Some analysts, such as Michael Vinciquerra of Raymond James, say that antitrust issues in Europe may wind up making a Euronext-Deutsche Börse tie-up unlikely, and they're gratified that the European Union has declined to review the German-Swiss exchange's plans, at least until it lays out a formal takeover offer. "It's becoming more likely [the NYSE will] close the deal in Europe," says Vinciquerra.

The NYSE Group's share price will probably move south if Euronext doesn't wind up in New York's camp. And since that's the biggest uncertainty about the long-term future, it's likely that shares could climb if the deal is clinched.

Getting High Marks

Luckily for Thain, the Euronext possibility isn't the only good thing the NYSE has going for it. The company has been telling Wall Street in investor presentations that its new hybrid system—in which 250 selected stocks are trading in a way that combines electronic systems with the traditional floor-based specialist system—has been proving a hit.

Investors like the speed of the system and its ability to match prices between buyers and sellers almost instantaneously. Vinciquerra says it seems to be boosting the market share of stocks that the NYSE is handling, taking some business back from rivals such as Nasdaq. "The early returns are showing some gains," he says.

Thain has also been getting high marks on Wall Street for cutting costs. He recently announced that he would eliminate some 520 jobs, as he keeps lopping off overhead that accumulated when the NYSE was a member-owned nonprofit, instead of a profit-oriented publicly traded outfit.

The stock is also getting a boost from Thain signaling his keen interest in being a player, even beyond Euronext, in worldwide consolidation among exchanges. On Nov. 9, he said he was willing to talk with Borsa Italiana, the Italian stock market, about working together. The Italian market's talks with Deutsche Börse fell through. The NYSE has also been considering inking a deal to work more closely with the Tokyo Stock Exchange.