Friday, May 26, 2006

Cramer on the Euronext - NYSE deal (or prospect of a deal)

I am no fan of CNBC Mad Money's Jim Cramer, but I enjoy watching his show because of the insight it offers and because his impressions drive the market more than a lot of market strategists do. So when I opened today's WSJ opinions page and saw the article on the Euronext-NYSE deal (not official), I was surprised to read such an interesting viewpoint from Cramer. Most of us think of Cramer as the crazy guy that appeals to people that don't know the markets. Sure his show caters to the retail guy with a $20k E*Trade account, but Cramer is a market guru that knows as much about trends as anyone in the business.

So anyway, the buzz these days is on the Euronext - NYSE tie-up, or the possibility of one. Apparently there was an extensive conference call between research analysts and NYSE CEO John Thain regarding the NYSE's bid for Euronext. Questions revolved around cost savings and growth post-deal, but nothing asked why the deal was necessary. Well, the answer is, nobody wants to go public in the U.S. anymore. SarBox, SEC scrutiny, stock options scrutiny, guilty till proven innocent atmosphere, and other factors make the largest Companies shy away from listing in the U.S. And can you blame them? Slap on the wrists have turned into jail-time and Christopher Cox and the SEC has turned the markets into a "strike fear in their (listed Companies') hearts" type of atmosphere.

There is more to the article, which i have pasted below for those without a WSJ subscription. If you have and would prefer to read it on the WSJ website go here.

Behind the Euronext Deal

May 26, 2006; Page A10

When the New York Stock Exchange unveiled its $10.2 billion bid for Euronext, a handful of the most senior, astute analysts in brokerage and finance grilled the Big Board's CEO, John Thain, about the merits of the merger in a morning conference call. The seemingly well-informed participants peppered him with 25 questions about the prospective combination's technology synergies, cost savings, valuations and management responsibilities. Mr. Thain answered every one eloquently and explained everything the proposal had to offer shareholders of his newly minted NYX stock.

Everything, that is, except the reason for the deal.

No one asked; and Mr. Thain never told. But the NYSE merger with some European outfit that no one had ever heard of isn't even about saving a few bucks in overhead. It is imperative for the survival of the venerable Wall Street institution; and why it is imperative can be expressed in one word: Washington.

What the analysts should have asked is how this merger will change an unfathomable situation: that 23 of the 24 firms recently looking for more than a billion dollars in capital chose to list overseas rather in the U.S. We know that nauseating statistic because Noreen M. Culhane, an NYSE executive vice president, revealed it to the SEC at a May 10 hearing. There, she told a panel that "it's pretty irrefutable that there's been a sea change" among the world's financial entities to avoid U.S. regulation by raising capital overseas.

Put simply, we've gone, in a few short years, from being the nation most hospitable to capital formation to one most hostile to it. Our once-freewheeling capitalism has been replaced with a bizarre thicket of rules, laws and prosecutions designed to protect Americans from every conceivable financial risk, even if it means no one can get the rewards and the money goes elsewhere. We've created a tortured anti-capital market where accountants and lawyers try to stop you from saying and doing anything that's aggressive, especially if it is positive, and the government lets companies be sued when anything goes wrong, regardless of the merits. You make a big enough mistake in business judgment and they don't just bring in the SEC; they call in the Justice Department and criminalize behavior that once merited a fine or a simple reprimand. Then the Justice Department sues not only the individuals who allegedly did wrong, but the often clueless board of directors, or worse, the whole firm!

Our socialist friends in Paris, whence Euronext hails, embrace a more fluid form of capitalism. European markets allow for much less onerous regulation and much more creative finance, which is why every private equity firm seeking capital lists on outfits like Euronext. They don't put people in jail for expensing options. They don't subject companies to endless strike suits simply because they missed a quarter. And they don't make companies run a Sarbanes-Oxley accountant-protection-racket gauntlet, which adds millions of dollars in excess fees from the moment they turn public, without any obvious benefit to shareholders.

Of course, the NYX-Euronext merger doesn't just get around the federal government regulations that keep capital from being raised here. Euronext gives the NYSE a backdoor way to the fastest growing financial instruments -- the derivative markets, options and futures -- which a couple of outfits here, the Chicago Mercantile Exchange and the Chicago Board of Trade, have dominated: thanks, again, to protection from Washington.

There's a reason why the derivative tail, the Chicago Merc, has a market capitalization roughly twice that of the NYSE dog: The world is full of billionaire gamblers, and only the Chicago boys can create the new tables that attract them. Given their near-monopoly on most things derivative, the Merc, along with the Chicago Board of Trade, both have pricing power the NYSE can only dream of. Their stocks have become favorites of momentum investors because they raise fees fairly consistently every year. Contrast that with the NYSE and its fierce rival, the Nasdaq, which are constantly lowering fees to compete over new corporate listings.

Euronext gives the NYSE a way to circumvent Washington's regulatory protection of these Chicago rackets, and get into the action. With Euronext as his partner, Mr. Thain can be in the running both for the huge sums being raised in Europe, and for derivatives on worldwide indices, without much additional overhead.

After the Enron and WorldCom scandals, securities industry representatives told politicians and regulators in Washington that, unless they were careful, the money that was routinely raised in New York's capital markets would rapidly go overseas. Most politicians figured that was just a chimera created by Wall Streeters trying to protect their lucrative turf. Nope. Money is indeed fungible, and it did flow to Europe.

The New York Stock Exchange has to go with those flows, even if it means overpaying for Euronext to keep it from falling into the arms of rival Deutsche Borse. Judging by the recent cascade in the NYSE's stock, the betting here is that Mr. Thain will have to pay more than he would like. But without Euronext, he's facing a shrinking pie, lower trading fees and a regulatory environment that simply renders the U.S. uncompetitive with just about any market in the world.

In short, this merger proposal is not a move to save a few hundred million bucks in technology and labor. It is a Darwinian play to beat Washington's chokehold on capital formation and derivative regulation. Euronext may be Mr. Thain's only life raft to keep from drowning in the regulatory current that's sweeping trillions in capital from our country to the bourses of Europe.

Mr. Cramer is chief markets commentator of and host of CNBC's "Mad Money."


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