Warren Buffett’s proposal to take over NYSE Euronext, while rejected in favor of a higher offer last year, is boosting optimism that the world-famous stock picker sees a rebound in trading from a four-year low.
The bid for the New York Stock Exchange owner, made in November and disclosed yesterday in a government filing, came amid signs investors are returning to stocks after volume fell 18 percent in 2012. U.S. equity funds took in a record $3.1 billion at the beginning of this year after investors pulled about $250 billion since 2009, based on data from EPFR Global.
The value of American equities has risen by $1 trillion this year as the biggest January rally since 1987 pulled the Standard & Poor’s 500 Index within 4.4 percent of its record. Even though IntercontinentalExchange Inc. won NYSE Euronext with its $8.2 billion bid announced in December, Berkshire Hathaway Inc.’s interest may signal exchange earnings are poised to rebound, according to PNC Wealth Management and Tabb Group LLC.
“He’s saying maybe things will turn around and volume will come back,” E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia, said in a phone interview. His firm manages about $112 billion. “It is a company that just benefits from transactions, and we all know the challenges of stock volume moving away from the exchanges.”
Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Buffett didn’t respond to a request for comment sent to an assistant.
Berkshire was “Company A” named in a regulatory filing yesterday as making the Nov. 28 bid for NYSE Euronext, said two people with knowledge of the matter who asked not to be identified because the offer wasn’t public. The transaction was conditioned on the exchange operator selling its European derivatives business, according to the filing.
CME Group Inc., the world’s largest futures exchange, also approached NYSE in October last year about a deal with its derivatives business, according to two people familiar with the situation. The Chicago-based exchange, which offered to provide clearing for NYSE’s Liffe U.K. derivatives exchange, and NYSE didn’t start formal negotiations, the people said.
Buffett may have proposed buying the company because the shares are cheap, said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $370 billion. NYSE Euronext traded at 11.6 times reported earnings in November, compared with a multiple of 16.3 for a measure of 25 exchange operators around the world, according to data compiled by Bloomberg.
“It’s reasonable to assume that he perceived a mismatch between the value of NYSE and the then-current price,” Creatura said in a telephone interview yesterday. “There’s a price tag for everything, even things that aren’t growing.”
Average daily volume for stocks listed on U.S. exchanges has declined every year since 2009, falling 18 percent in 2012 to a low of 6.42 billion shares per day, according to data compiled by Bloomberg. That compares with 9.77 billion in 2009, the data show. The daily average in 2013 has been 6.31 billion.
NYSE Euronext’s share of U.S. equity trading has shrunk to about 20 percent from 82 percent a decade ago amid the proliferation of other venues, dark pools and broker-run markets. While profit at the company has fallen for the past three quarters, analysts are projecting a 22 percent rebound this year, based on estimates compiled by Bloomberg.
“The fact that Mr. Buffett made an offer has got to make you feel that this industry is not dead and ready for a return to glory,” Larry Peruzzi, senior equity trader at Cabrera Capital Markets LLC in Boston, wrote in an e-mail. “I would view this as a positive for exchange volumes.”
ICE, based in Atlanta, said on Dec. 20 it will pay $33.12 a share for the owner of the New York Stock Exchange. Both boards approved the proposal and the companies expect to complete the transaction in the second half of 2013.
ICE said will seek a European Union merger review of its plans to buy NYSE Euronext to avoid multiple probes across the 27-nation bloc. While the company must formally ask U.K., Portugal and Spain to approve the deal, it said it will ask for EU regulators to take charge of examining the transaction, according to a regulatory filing published yesterday.
NYSE Euronext is scheduled to report fourth-quarter earnings on Feb. 5. The shares have risen 40 percent since Dec. 19, the day before the takeover was announced, compared with a 7.9 percent advance for the Bloomberg World Exchange Index. The stock rose 0.6 percent to $33.91 at 10:25 a.m. New York time today, advancing for a fourth straight day.
Buffett has relied on long-term stock bets on companies such as Coca-Cola Co. and Wells Fargo & Co. to fuel the growth of his Berkshire Hathaway from a failing textile maker to a $242 billion firm.
“The stock market generally is the best place to have money,” he said in a CNBC interview on Oct. 24.
Berkshire Hathaway’s cash pile climbed to near-record levels of $47.8 billion in the third quarter as Buffett extended his search for larger acquisitions. The Omaha, Nebraska-based company’s more recent deals have included a building-insulation maker and food-distributor Meadowbrook Meat Co. as Buffett’s firm completed so-called bolt-on purchases that cost $1.8 billion in the first nine months of 2012.
“He’s signaling confidence from a volume perspective and perhaps signaling the fixed income markets are tapped out,” Larry Tabb, chief executive officer of the Tabb Group. “He seems to suggest we could see a rotation back into equities.”