A Gold Mine Called the Big Board?

Sooner rather than later, most people will find the name Dick Grasso hard to place, and the New York Stock Exchange will shake off the mud that covers it today. Then, somewhere in this dreary process called "moving on," the prospect that the Big Board itself is going public will glow.

As alluring as an initial public offering of stock may prove to 1,366 NYSE seat holders -- the exchange's actual owners -- arranging the deal would not be simple. Even a ticker symbol is tricky. The four letters NYSE almost surely wouldn't do, since the world's leading stock exchange has prided itself on issuing common stock symbols no more than three letters long. (Note to Santiago, Chile's BBV Banco BHIF, holder of the Big Board's BB symbol: Stay flexible.) Just the same, as an investment the NYSE is a potential gold mine -- even if it hasn't paid lately.

You can get a glimpse of this from the NYSE's financials. The most recent set is for the year ended last Dec. 31. As a not-for-profit, the NYSE doesn't release the full quarterly details required of public companies. Instead, it gives just a few interim figures: Through June 30, revenue ran flat at $539.5 million, while net income rose to $27 million from $20.7 million. That improvement had to be welcomed warmly. Since 1998, the Big Board's operating margin got crushed, coming in last year at 4% on a bit more than $1 billion in.

THIS, PERHAPS EVEN more than the investing public's post-bubble hangover, accounts for the 30% plunge in value of a stock exchange seat. The highest price for a seat, $2.65 million, was paid in 1999; the most recent price, on Sept. 18, was $1.85 million. If each of the exchange's 1,366 seats could be had for that, the total would come to $2.5 billion. But this in no way captures the Big Board's potential public market value.

Consider events 500 miles west-northwest of Wall and Broad. Just before the Toronto Stock Exchange converted to a profit-making company, in April, 2000, its 133 seats traded near $37,000 each, indicating a total value then of less than $5 million. Last November the exchange's parent, TSX Group (TX ) went public and soon had a market value of a bit under $500 million. Today, TSX's market cap tops $800 million. Last December the Chicago Mercantile Exchange followed suit. The stock has doubled, giving the Merc a value of $2.2 billion.

If it goes public, the Big Board can count on an expansion of value, too. To do this, it needs first to change, as the Merc says it did, from an organization designed "to offer profit-making opportunities for our members and to limit our profits" to one focused on its own bottom line. In so doing, it might have to give up some or all of its regulatory duties, foregoing revenue that now makes up 12% of its total. This likely doesn't account for much profit, notes Chris Ruggeri, a managing director at Standard & Poor's Corporate Value Consulting (like BusinessWeek, owned by The McGraw-Hill (MHP ) Companies), but it is one of many question marks in imagining an NYSE valuation.

Suppose, just the same, that the NYSE instantly managed itself toward the 35% or so operating margins enjoyed recently by publicly held rivals. Then, it next year might show operating profits of, say, $385 million. Other public exchanges tend to trade near 13 times operating income and roughly five times sales. At these multiples, the NYSE would draw a market value of around $5 billion, or about double the current value of its seats -- enough to make the Big Board forget the name Dick Grasso.

By Robert Barker

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