After posting the notes from the NDAQ presentation yesterday we got to thinking about the exchanges and ran some numbers.
That the NYSE will merge with Euronext seems clear enough although the management of Euronext has insisted on a number of conditions that could slow down or even prevent some of the synergy that the NYSE sees in the combination.
Nasdaq still has no visibility on taking over the LSE although they remain utterly committed to make it happen.
Both the LSE with AIM and the Euronext with Alternext have been making quite a bit of noise over being the next destination for small and medium sized companies looking to raise captial and create a public listing.
Because we fled the brokerage business a few years ago our ideas around the profitability from trading had a negative bias. However what has been (and continues to be) nothing but pain for brokerages in terms of declining trading commissions has only been good for the exchanges.
There are two reasons. One macro reason is that lower fees are driving more volume which actually helps them grow and maintain their transactional fees. Secondly many of the exchanges actually have far more revenue coming from areas outside of raw transactions.
Along with consolidation the exchanges are enjoying major top-line growth and mouth watering profit margins. They are sporting trading multipes to go with their prospects.
The *average* EV/Rev multiple is now 12.3x 2006 numbers. The average PE ratio on 2007 earnings projections stands at 35x. These numbers begin to compare to the best in the markets.
These juicy margins and valuations have not gone unnoticed by some of the major brokers that trade at much lower valuations as a rule. In what appears to be increasingly a technology race the brokers, especially the large ones, have substantial resources and expertise. They have been making moves to create their own mechanisms to trade shares without having to involve external exchange players.
One major question looms which is increasing competition next year even among themselves. The NYSE is making a major investment in merging with Euronext and the Nasdaq has made a major bet on the LSE. Interactive Brokers has filed an S1 and hopes to join the ranks of the incredibly successful public market for their peers.
We should probably be a little worried that the group is priced for perfection and piles of equity are being sold right here in both IPO and secondary transactions.
Beyond that one wonders how this fits into the evolving equity markets, particularly for public offerings and investment research (our forte). Time will tell but in the mean time we’d want to tread carefully in these names.