Shareholders of NYSE Euronext (NYX) were treated to some fun news yesterday morning: the company has agreed to be acquired by Atlanta’s Intercontinental Exchange (ICE). The offering price of $33.12 per share represents a 37.7% premium to NYX’s closing price on December 19. Pending regulatory approval, the deal is expected to close in the second half of 2013. As we recently discussed in our global investing whitepaper, we expect capital market integration to continue to be a trend into the future.
With certain client-specific exceptions, we are in the process of eliminating our position in NYX. There are a few reasons why we believe this is action is more suitable than waiting for the deal to close later next year:
1. Our investment objective for NYX has been to capture a high level of equity income with clear capital appreciation potential, whereas ICE pays no dividend. Converting NYX shares to ICE shares (one option) exchanges an income-oriented position for a capital appreciation-oriented position. Whether we see sufficient appreciation potential in ICE is a separate analytical question from whether clients who own NYX as a source of equity income should continue to hold the shares. That type of distinction is critical to our process of tailoring investment portfolios to the unique needs of each client.
2. One of the acquisition elections is for NYX shareholders to receive cash of $33.12 per share. This cash option effectively locks in the maximum appreciation potential in the shares of NYX. Assuming the deal goes through, that represents upside of only about 2.5% from the current NYX share price. While we expect the deal to be approved, there is some risk that it will not. In 2011, NYX received a purchase offer from German exchange Deutsche Börse, which was quickly topped by a joint NASDAQ (NDAQ) / ICE offer. In May of last year, NDAQ / ICE withdrew their offer after the Justice Department indicated it would challenge the deal. It’s possible that ICE’s new offer has already received an informal nod from the Justice Department but even still, we don’t see enough appreciation potential from the current level to continue to hold.
3. Regardless of how (whether?) the President and Congress resolve the Fiscal Cliff problem, capital gains rates are headed higher in 2013. Under the Affordable Care Act, a new 3.8% investment tax on dividends and capital gains will become effective on January 1, 2013 for high-income taxpayers. Normally our preference would be to extend gains in taxable accounts into the next year when we’re able – particularly when that new year is only 11 days away. In this case, though, the cost of realizing gains for many investors is materially lower now than it will be next month.
While our estimate of NYX’s fair value was higher than ICE’s offer, we are very pleased to have realized the appreciation in the stock, as well as the dividend income.
Peloton Wealth Strategists does not own the common stock of NASDAQ OMS Group, Inc., or of Intercontinental Exchange, Inc. Peloton Wealth Strategists owns the common stock of NYSE Euronext, Inc. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Peloton Wealth Strategists assumes no liability for losses pursuant to investment actions entered into as a result of opinions expressed herein. Changes in economic and capital market conditions and the unique objectives of each investor should be considered before investing in securities.