NYSE Euronext Acquisition of AMEX Update Call Transcript

NYSE Euronext (NYX)

Acquisition Announcement Call

January 17, 2008 5:15 pm ET

Executives

Gary Stein – Head of Investor Relations

Duncan L. Niederauer – President, Chief Executive Officer & Chief Operating Officer

Lawrence Leibowitz – Head of Global Technology on US Trading

Neal L. Wolkoff – Chairman & Chief Executive Officer (AMEX)

Analysts

Joshua Elving – Piper Jaffray

Alex Graham – Lehman Brothers

Christopher Allen – Banc of America Securities.

Donald Fandetti – Citigroup

Richard Repetto – Sandler O’Neill & Partners L.P.

Daniel Harris – Goldman Sachs

Edward Ditmire – Fox-Pitt Kelton

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the NYSE Euronext conference call. My name is Amanda and I will be your operator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Gary Stein the Head of Investor Relations. Please proceed sir.

Gary Stein

Good afternoon. I’m Gary Stein, Head of Investor Relations for NYSE Euronext. We are pleased to hold this conference call to discuss today’s announcement regarding the acquisition of the American Stock Exchange. During this call our comments may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext’s current expectations and involve risks and uncertainties that could cause NYSE Euronext’s actual results to differ materially from those in the statements. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward looking statements. You should not place undue reliance on forward-looking statements which speak only as of the date of this conference call. Accept for any obligation to disclose material information under the Federal Securities law, NYSE Euronext undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

In connection with the proposed acquisitions by NYSE Euronext of the AMEX, NYSE Euronext intends to file with the US Securities & Exchange Commission a registration statement on Form S4 containing a preliminary proxy statement prospectus regarding the proposed transaction. The parties will file other relative documents concerning the proposed transaction with the SEC. Such documents however, are not currently available. AMEX members are urged to read the proxy statement prospectus regarding the proposed transaction when it becomes available because, it will contain important information. AMEX members can obtain a free copy of the filed proxy statement prospectus as well as other filings containing information about NYSE Euronext and AMEX without charge at the SEC’s website.

The proxy statement prospectus shall not constitute an offer to sell or the solicitation of an offer to buy any securities. Nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933 as amended.

In a press release issued earlier today, NYSE Euronext, the world’s most largest and liquid exchange group entered into a definitive agreement to acquire the American Stock Exchange. Under terms of the agreement NYSE Euronext will pay $260 million in NYSE Euronext common stock for the AMEX. In addition, AMEX members will be entitled to receive additional shares of NYSE Euronext’s common stock based on the net proceeds from the expected sale of AMEX’s lower Manhattan headquarters. This proposed business compensation was approved by both companies’ board of directors. Subject to approval by AMEX members and customary regulatory approvals including, from the US Securities & Exchange commission and the Department of Justice, this transaction is expected to close in the third quarter of this year and be accretive to NYSE Euronext’s 2009 earnings.

With me on today’s call are Duncan Neiderauer, Chief Executive Officer of NYSE Euronext; Neal Wolkoff, Chairman and Chief Executive Officer of the American Stock Exchange and Larry Leibowitz, Head of Global Technology on US Trading for NYSE Euronext. I’ll now turn the call over to Duncan. At the conclusion of our remarks, we will take your questions.

Duncan L. Niederauer

Thanks to everyone for joining the call and I also want to extend some thanks to Neal Wolkoff who is with us and his team at the AMEX as well as our respective boards of directors for moving forward with this historic and strategic combination. As Gary said, we are the established leader in global financial market consolidation offering the most attractive and diverse array of products of any global exchange and we think the addition of the AMEX to the NYSE Euronext’s family is high beneficial for our shareholders and our customers.

This transaction will significantly enhance our scale in US options, cash equities, [inaudible] traded funds, closed end funds and structured products and is consistent with our strategic objectives which strengthen our competitive offering in the US. The acquisition of the AMEX will produce significant operational efficiencies and create new business opportunities for NYSE Euronext. The highlights of which include the following: with this transaction we obtain a second US options exchange license which enables NYSE Euronext to operate a compelling dual market structure making available to all customers the choice of price-time priority on NYSE Arca and the AMEX’s traditional market-maker model. Secondly, we’ll operate a third complimentary US cash exchange license in addition to the NYSE and NYSE Arca licenses. Third, we’ll add volume to NYSE Euronext’s robust options business making NYSE Euronext the third largest options market place.

Next, we’ll strengthen NYSE Arca’s leadership position in ETF listing and trading as we pair up over 350 AMEX ETF listings with nearly 250 NYSE Arca ETFs. We’ll also add to our presence in listing and trading close end funds and structured products. With the AMEX acquisition come nearly 550 listings on AMEX which will be combined with our nearly 1,000 listings on the NYSE. We’ll also realize run rate costs synergies of over $100 million within two years from closing including saving on the technology side, data center side and staff integration as well as, consolidation, professional and contract services and vendors. Lastly, we will relocate AMEX trading floor operations to the NYSE trading floor.

Now, I will turn the call over to Mr. Neal Wolkoff. Neal, it’s all yours.

Neal L. Wolkoff

Thank you very much Duncan. I’d like to thank you and the rest of your team at the NYSE Euronext. I certainly echo your comments in saying that this transaction will, when approved, result in a compelling combination of assets. When our board met this morning the mood in the room was one of excitement and I’m pleased to say that on the AMEX side the transaction has very broad support with the board. I personally am very excited to be leading the AMEX management team, to work with Duncan, Larry and the NYSE Euronext team on a detailed transition plan to smoothly and efficiently complete the transaction and to maximize the benefits to all concerned.

Duncan L. Niederauer

Before we open it up to questions guys, I just want to add one more thing to reiterate something Neal just said. Not only do we look forward to working with all the folks at AMEX going forward but, in the short run I think you can count on us as well as Neal and his team to make sure that on the transition and all the integration work that is going to be required, we are going to be working very, very closely together when we’re permitted to which is obviously, really not much until after the closing. This commitment on both sides includes everyone doing their best to serve our customers and members of the AMEX during the transition and beyond. And, with that I think we’d like to open the line to questions unless Gary, you have anything else we need to talk about.

Gary Stein

No. We’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Josh Elving with Piper Jaffray. Please proceed, sir.

Joshua Elving – Piper Jaffray

My first question has to do with can you give us a ballpark of the expected sales price of the lower Manhattan real estate?

Neal L. Wolkoff

I actually can’t. The transaction, as you [inaudible] two parts of consideration one is immediate and defined and the second is contingent pending upon the market place when the real estate is exposed to the market we’ll understand much better the value and be able to determine at that time what the conversion into shares will mean.

Joshua Elving – Piper Jaffray

So, I guess if you look at the $260 announced initial price for AMEX, I would imagine it’s relatively material. Would that be fair?

Duncan L. Niederauer

I think the easiest way to think about it is that the $260 is for the business. Whatever the building sells for, when it sells for it, the net proceeds of the building will simply be delivered to the AMEX shareholders.

Joshua Elving – Piper Jaffray

Would that be cash or stock?

Duncan L. Niederauer

I think the intent is that it will be in stock. So, from our point of view we separated it intentionally so regardless of what the building sells for the net proceeds will be converted to stock and that stock will be delivered to AMEX shareholders on a pro rata basis.

Joshua Elving – Piper Jaffray

I guess the other question I had was in conjunction with some of the costs savings, the $100 million at a run rate in a couple years post closing, is that essentially tie in with some of the costs savings associated with the Euronext transaction in a sense of would we expect to see a lot of those costs savings kind of back end loaded? Or, would that be something we would recognize periodically over the next two years?

Duncan L. Niederauer

Larry do you want to take that one?

Lawrence Leibowitz

I think that you’ll see those sooner than in the Euronext [inaudible] because they don’t require full rewrite of relatively complex systems.

Operator

Your next question comes from the line of Alex Graham from Lehman Brothers. Please proceed.

Alex Graham – Lehman Brothers

Just a follow up on the question on the costs savings before. Can you perhaps give a little more detail on how those breakdowns, maybe even some low hanging fruit that will come fairly early like overhead, administrative and then the technology and more down the line?

Duncan L. Niederauer

Yeah, I think it’s a little early to predict that so I think, as you will hear on our February 5^th conference call and we intend to start providing more transparency and too generally, when a lot of these savings that we’ve talked about historically are going to be delivered. I think it’s a little premature to give that much detail prior to the closing of the deal. But, to the extent we can provide it in the coming weeks and months, we certainly will.

Alex Graham – Lehman Brothers

Okay. I guess secondly, obviously on the options business you’re going to pursue a dual strategy here and on the market-maker side, on the AMEX side what kind of plans have you outlined already to maybe jump start that side of the options business? And, to maybe go after the bigger players like CBOE, ISE, [inaudible] and perhaps what does Arca bring to the table in terms of an electronic solution and so forth.

Lawrence Leibowitz

I think you actually put your finger right on it. We think that AMEX has some great products and some great traders but, they’ve been hampered a bit by the technology up until now. We think that the Arca options platform as a base adding to that a market-maker model is going to make it among the best in class.

Alex Graham – Lehman Brothers

Then lastly, is that the same on the equities business as well? Because, I think AMEX, I don’t know what the status is right there now but, I know they’ve been trying to build their own electronic business so, I guess the assumption is they will all move to Arca eventually? Or, at least the platform?

Lawrence Leibowitz

I think it would be too soon to [inaudible] that conclusion. I think it’s really going to depend on an issuer-to-issuer basis, where they move. But, I do think on the technology side you can assume that whether it’s the Arca, the New York Stock Exchange, or the Euronext basis as we converge those the AMEX will be part of those plans.

Operator

Your next question comes from the line of Chris Allen. Please proceed sir.

Christopher Allen – Banc of America Securities.

Just following up on the options platform; obviously, AMEX’s market share has deteriorated pretty rapidly over the past couple of years. Is technology just going to be the solution there? From the info sources I’ve talked to it sounds like a lot of the market share is still there is because the relationships the traders there have. So, I’m just wondering what’s the plan to stabilize the market share and potentially improve it over time?

Lawrence Leibowitz

Well, I think we’ve shown in the Arca options model that we can combine a floor that is vibrant and profitable and sustains a floor community at the same time as an electronic market side-by-side. So, we have a peak floor that flourishes, does great volume, has a very happy brokerage community sitting on top of an electronic platform. I think we will contemplate doing something similar just using an Arca based but making it more of a market-maker model rather than a maker-taker ESF like model and so we think we may actually be able to retain the vibrant brokerage community that the AMEX already has and maybe give them more tools to help them do their job even better.

Christopher Allen – Banc of America Securities.

Then, just on the listing business, can you just comment on the differences in pricing between AMEX and NYSE’s listings? And any plan to rationalize between the two?

Duncan L. Niederauer

I think the idea is, as Larry said, it’s going to be on an issuer-by-issuer basis. But, I think our plans over time is to converge to the model that we have in NYSE and NYSE Arca but, we haven’t even thought about whether we continue to have AMEX as it’s own listing brand going forward, whether we end up with three listing brands, converge it into two. But, I think we’re going to take a close look at which issuers would qualify for which brand under the listings umbrella and then just kind of take it one step at a time.

Operator

Your next question comes from the line of Don Fandetti with Citigroup. Please proceed sir.

Donald Fandetti – Citigroup

Most of my questions have been answered but, just quickly on this acquisition do you think this gives you the critical mass in the options business to where you can just grow organically? Or, would you be opened to another deal should an asset become available?

Lawrence Leibowitz

I think it very clearly gives us critical mass. In fact, I think we already had critical mass given the Arca platform but, with this it makes us the very strong number three. That said, this is consolidating industry and we’re always on the look out for properties at the right valuation, at the right timing if they’re a strategic fit. So, while I wouldn’t rule it out, on the other hand I don’t think it’s a strategic necessity either.

Operator

Your next question comes from the line of Richard Repetto with Sandler O’Neill. Please proceed.

Richard Repetto – Sandler O’Neill & Partners L.P.

First question, what share price are we using? What’s the mechanism to determine the share price?

Duncan L. Niederauer

Do you guys want to take that in New York since you’ve got the stuff in front of you?

Lawrence Leibowitz

Rich, it’s a 15 day trailing average price.

Richard Repetto – Sandler O’Neill & Partners L.P.

From closing?

Lawrence Leibowitz

From closing date.

Richard Repetto – Sandler O’Neill & Partners L.P.

Then, I guess this is a question for Larry. So far in January, a nice up tick in overall [inaudible] but nice up tick in the Arca market share, if my numbers are correct. Can you just explain sort of give a little more color on how you’re taking more share in those sort of volatile market?

Lawrence Leibowitz

I believe on Arca what you’re probably talking about the [inaudible]. Is that right?

Richard Repetto – Sandler O’Neill & Partners L.P.

No, no, no. I’m talking about NYSE Arca options.

Lawrence Leibowitz

I think that is the ongoing trend of decimalization. We really think that penny options, we have been the biggest beneficiary of that platform, our platform as a maker-taker model versus the directed order flow models. You know, I think that’s going to be an ongoing trend in the options business as more goes penny.

Duncan L. Niederauer

And, at the same time Rich, as we’ve said a couple of times publicly both Larry and myself, we’re pretty convinced that even though that trend will continue, we think that options market structures kind of test them to be bifurcated where if we can have a foot in both the directed model and the model that’s more effectively positioned for the trends we see towards more the serious trading we see in pennies, I think I like our position very much. We can have a very solid position in both types of market structures which we think are going to be important going forward.

Lawrence Leibowitz

We think this is very analogous to the equity situation where you have maker-taker models like ECN and you also have directed flow models and that case it’s the wholesalers like UBS or Citi and all those others and those models exist side-by-side.

Richard Repetto – Sandler O’Neill & Partners L.P.

That’s a very popular strategy out there in the options industry right now. The dual – covering both market-maker and maker-taker. But, anyways this lead into my last and final question, if Arca options is being affected taking it from the traditional model, I’m just taking a look at who’s winning and who’s losing, at least over the last year. You know, Larry and Duncan, you guys are winning on Arca options [inaudible] picking up share. Could you have been taking share from AMEX? The numbers are pretty – I’m sure you can’t tell exactly who’s taking who but they’re almost like very closely correlated, inversely correlated; put it that way.

Lawrence Leibowitz

We feel like we’re taking volume from many of the directive players. I think what you’re going to see is a shift in balance between directive which use to be 100% and maker-taker which was zero and that will shift but it will reach some equilibrium of both. And then, I think on the directive platform with a solid technology basis, low latencies solution, able to handle the band with requirements, more sophisticated option strategies and things like that we think we can compete with some of the more directive platforms as well and sort of get them from both sides.

Richard Repetto – Sandler O’Neill & Partners L.P.

Very last question, again hitting on the costs here, what’s the biggest thing that moves the needle? I can guess but I’d rather have you tell me. Towards in the $100 million sort of trudge?

Duncan L. Niederauer

I mean, if we had to guess today Rich and we’re going to get into more details, I would say certainly on the technology side and certainly on the staff integration side.

Operator

Your next question comes from Daniel Harris. Please proceed sir.

Daniel Harris – Goldman Sachs

I was hoping Larry and Duncan, you guys could comment on there’s a number of transactions that you guys have either announced or closed and that’s Wombat today, Euronext last year. Can you help me think about how you keep track of all the integrations that are going on in the technology on the location side? And, how you all sort of reiterate that to us on the investor side?

Duncan L. Niederauer

Larry, why don’t you take the first swing at that and then I’ll follow on.

Lawrence Leibowitz

I think you bring up a couple of good points. To the sense that we’re doing many deals, it becomes harder and harder to sift out specifically which integration came from which deal because we run this as a business. So, I mean that’s just the nature of running a more complicated company. On the other hand, it’s incumbent upon us to identify projects where the synergies come from and then run a discipline business where we make sure we hold ourselves accountable in getting those synergies. The net should appear in the cost line. Whichever project it actually was, if our costs don’t behave according to the way we say then, we must not have gotten the synergies. Or, we got the synergies and gave it up by not paying attention to our costs. The bottom line is what happens to our costs line over time.

So, I think in the case of Euronext, New York Stock Exchange, Arca those were relatively well defined technology projects and we can point to them and say, “We got these,” for a lot of it. And, some of it is just headcount reduction as we do things better and I think as we add the AMEX piece to that puzzle again, some of them are very straightforward and some of them are just the nature of we’re running things more efficiently because we can just do it better at scale. Dunc, do you want to add to that?

Duncan L. Niederauer

No, I think that’s basically right on point. And, we realize we’re doing a lot of these things and we realize that it gets harder and harder to track the synergies on individual deals because of how this stuff gets rolled in. I think that’s particularly true in the case with Wombat where, if you noticed, it was really a different part of the value proposition and what we’re trying to build here and you didn’t hear us talk much about synergies. It was more offense than can we integrate and take costs out of the system. It was more, how do we lay the stuff that Wombat does somewhere in between what we already provide on the market data side and what we already provide on the networking side? We realize that for all of you we are obliged to provide as much transparency going forward as we can but, as Larry said, as the business gets more complicated it’s going to be harder for us to identify specifically some of these savings and that’s going to make some of you cynical and skeptical but, that will be our job to show you, as Larry said, at that top level are we managing the costs effectively or not? The proof will be in the pudding.

Daniel Harris – Goldman Sachs

So Duncan, if I can interpret that, as we go forward whether that’s the fourth quarter or fourth quarter earnings calls or anytime over the next six to nine months, should we expect you that you guys will lay out a more concrete definition of how those integration are going and potentially even with numbers around what you guys have gotten versus what may still be out there?

Duncan L. Niederauer

That’s the plan.

Daniel Harris – Goldman Sachs

Just a little bit more detail on the AMEX. So, there’s 471 employees, can you sort of breakdown for us where those people are? Are they mostly technology, operations, real estate?

Duncan L. Niederauer

I think Neal, you’re probably best positioned to answer the demographics of the population on a real time basis after the recent changes you made.

Neal L. Wolkoff

Yeah. We recently had a reduction in force so the staff size is about 380. The majority of the staff is still in either the technology or core operations areas. We have relatively small pockets of expertise in basically product innovation and marketing for listings, exchange traded funds is a very strong area, our options area is still a strong area with respect to the relationships with a lot of innovations in market structure and the like. I think we have been, as Larry said, held back to some extent by technology. But, that I think is a fairly clean breakdown.

Daniel Harris – Goldman Sachs

Is it safe to say that from the 471 down to the 380, that’s the largest driver of why you guys are probably operating at a breakeven or better going forward? Or, is the increased volumes that we’ve been seeing on the Arca, on the AMEX part of that as well?

Neal L. Wolkoff

I have the good fortune of not being a public company so I don’t have to look at what will be going forward. Obviously, going through a reduction in force of about 20 or 25% of the staff was intended to reduce costs to improve the bottom line. And, I expect that will be the case as we continue to operate as an independent company. We still have our goals for increasing business, improving the number of the listings, improving our service. This is by no means a coasting operation through the closing of the business. We plan to be very aggressive competitors in the industry and all of our main lines of business and to operate as if we are an independent business because, indeed we are.

Daniel Harris – Goldman Sachs

Then just lastly, if I could ask and I’m not sure if you guys even have the answer quickly. If you talk about being accretive in 2009, is that largely from taking expenses out today and you’re overall cost structure? Or, are you assuming any incremental revenues growth from hereon in the AMEX business?

Duncan L. Niederauer

You guys in New York want to take that? Or, is that something for a later discussion?

Lawrence Leibowitz

I think that will be something for later discussion.

Operator

Your next question comes from the line of Ed Ditmire with Fox-Pitt Kelton. Please proceed sir.

Edward Ditmire – Fox-Pitt Kelton

Does having multiple SROs and either equities or equity options allow you to do things like bundled pricing? Or, something that would drive revenue synergies out of having more than one SRO regulated exchange under one roof?

Lawrence Leibowitz

That would be a lovely thing. As of now, that does not appear to be possible within the regulatory framework. On the other hand, we’re going to be as creative as we can within those regulations and use those different SROs for essentially different pricing strategies and different offerings for different kinds of clients.

Operator

Your next question comes from the line of Alex Graham with Lehman Brothers. Please proceed sir.

Alex Graham – Lehman Brothers

Just one quick follow up Duncan, I guess for you. You’ve been working a lot on revitalizing the NYSE specialist business here over the last year or so. Does this deal impact that at all? Because, AMEX is obviously a very big specialist driven model as well. Was it even a consideration in the deal in terms of maybe even going to the SEC together as like two main specialist business models?

Duncan L. Niederauer

I don’t think it was really a consideration Alex because remember for a lot of the ETF listings in particular, I think we’ve already sent a pretty clear message to the market place that NYSE Arca is going to be our ETF listing venue. So, for a lot of the ETFs it’s really was a non-factor because it’s a non-decision. And then, I think it would just be a function of how many of the companies that are listed in AMEX would actually qualify to list in New York which is something we’ll take a close look at. But, I did not spend a lot of time thinking about what those models would look like. As you’ve seen us do with the New York model, I think part of it is revitalizing but part of it is really just changing the rules to still have a primary market-maker with responsibilities at the same time embrace the realities of today which are a lot more technology. So, I think we’re going to continue down that path for the NYSE stuff but, I don’t think we’re burdened at all by the fact that the AMEX as one also. But, I would tell you it wasn’t much of a consideration in the deal.

Operator

There are no further questions at this time.

Duncan L. Niederauer

We want to thank everybody for dialing in tonight and we’ll be happy to follow up with you if you think of more stuff as we work our way towards closing. And then, we’ll look forward to speaking to many of you in a couple of weeks on the fourth quarter earnings call which Gary, is February 5^th?

Gary Stein

Yes.

Duncan L. Niederauer

That’s it from here. Thanks everybody. Have a good evening.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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