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Charles Gasparino

Charles Gasparino

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Duncan Niederauer Calling the Shots for NYSE Is Bad News for Shareholders

Posted: 04/12/11 06:08 PM ET

Duncan Niederauer, the CEO of the New York Stock Exchange, doesn't like the people at the Nasdaq and Intercontinental Exchange much these days. He calls them "interlopers," who are trying to mess up a good thing for NYSE shareholders and its employees with a rival bid designed to do nothing more than obliterate his grand plan to remake the exchange into a global power house by merging it with the Frankfurt-based Deutsche Börse.

All of which sounds good until you realize the track record of the guy making those statements, who probably should have resigned or at the very least recused himself from deciding on the NYSE's next move so a less conflicted and maybe more competent executive can make what might be the biggest decision in the NYSE 219-year history.

First a little background on Niederauer: He's one of a long line of Goldman executives who have been running the stock exchange since then CEO Hank Paulson (later the treasury secretary who failed to see the financial crisis until it was too late) led the effort to oust long-time CEO Dick Grasso in 2003. Paulson & Co., said they were doing the Wall Street equivalent of God's work (sound familiar?). Grasso received a compensation package of around $140 million, and the public outcry over his oversized salary was endangering the exchange's status as the world's premier stock market.

At least that was Paulson's spin; the reality was much different. Goldman had been prodding the exchange to ditch the way it matched buyers and sellers of stocks through human floor traders for years and move to an automated, computerized marketplace. Indeed, once Grasso was out, the firm brazenly engineered the sale of its own electronic stock exchange to the NYSE in one of the most conflicted deals I have ever seen in all my years covering Wall Street.

During this time Niederauer emerged as one of the loudest though not necessarily the most articulate advocates of computers over floor traders, which makes his concern about the loss of jobs if the Nasdaq bid is successful even more suspect. Niederauer is infamous for saying that he didn't want "five guys named Vinny" trading stocks at the NYSE as a way to profess his love of electronic trading, even if it offended every Italian-American trader on Wall Street.

That dopey -- some would say xenophobic statement -- didn't appear to slow down Niederauer's career trajectory. Under Grasso's replacement, fellow Goldman alumn John Thain, Niederauer became the NYSE's president. In late 2007 when Thain went on to run Merrill Lynch leading the firm while it crashed and burned during the 2008 financial collapse, Niederauer got his shot at running the Big Board, where he promptly apologized for the Vinny remark, and continued the NYSE's move into computerized market making of stocks.

Under Niederauer, the NYSE didn't implode ala Merrill, but its performance has been nothing to brag about. During the Niederauer years, floor traders continued their exodus, but that doesn't mean the exchange has become a more efficient marketplace. Indeed there has been at least one "flash crash" under his watch, where prices of NYSE listed stocks declined precipitously because of technical glitches. Meanwhile, NYSE shares, trading under the symbol NYX, have nose-dived more than 50% since he took over. Some of that collapse, of course, can be attributed to the slow down in trading following the 2008 financial crisis. But even as the overall markets have mounted a recover, the NYSE hasn't.

By any measure, the fabled "Big Board," once the very symbol of global finance, isn't so big anymore. The NYSE is no longer the primary to match the buyers and sellers of stocks, as it had been for most of its long history. Indeed, many of the firms that once flocked to have their shares "listed" and traded on the NYSE's "Big Board," are choosing other venues.

The NYSE's weakened competitive position left the Big Board no other choice but to find in Wall Street parlance "a strategic partner," which in plain English means it needed to sell itself. Of course, that's not something Niederauer would admit to; he loves to describe his tie up with Deutsche Börse a "merger." But the numbers tell a different story: For every share of NYSE stock, his shareholders are getting .47 shares in the new company, while Deutsche Börse shareholders are getting a one-for-one exchange.

All of which wouldn't be so bad until you get into the nitty gritty of the NYSE-DB deal. Niederauer remains as CEO of the newly combined company, which when you crunch the numbers, values the NYSE at $35 a share, $3 less than the consensus of where analysts say the stock is worth.

Why would you sell a brand like the NYSE for less than what analysts say its worth? Niederauer would tell you its for the good of the franchise -- he has hooked up with a partner that wants to preserve the NYSE franchise while building a bigger brand that will benefit shareholders in the long run.

Others might say he's doing it save his job and remain as CEO at the expense of shareholders.

The people who make the latter point include Nasdaq chief Bob Greifeld who has recently teamed up the Jeffrey Sprecher at the Intercontinental Exchange to make a rival bid for the NYSE valued at around $42 a share -- a 20 percent premium to the Deutsche Börse bid. They make a compelling argument. It took Niederauer and his board just about a week to summarily reject the Nasdaq/ICE bid. They did so without even having the Greifeld and Sprecher make their case in front of the board, or at least hear from top shareholders about what offer might be better.

Instead, Niederauer simply brushed aside a a higher offer on the grounds that a combined Nasdaq-NYSE poses massive antitrust issues by merging two US stock markets (funny, Niederauer came to this conclusion even before regulators have had their say) and that the new company wouldn't be able to "deliver the synergies that the other proposal suggests without a substantial amount of job loss," according to an interview he gave to the Fox Business Network.

By the way, since when is it the job of a CEO to figure job loss into an equation that supposed to focus myopically on what is best for his shareholders?

I'm sure there are legitimate reasons to be wary of the Nasdaq/ICE bid. They would be breaking off chunks of the NYSE, with the Nasdaq taking the stock listing business, and the ICE taking the derivatives business. If the Nasdaq bid is successful, the new company would be more leveraged, thus Greifeld would have to slash expenses to make the numbers work, something he's good at, but its still a risk for buy-and-hold shareholders.

The problem is you can't really trust Niederauer to be making the final call because he has too much to lose, and so do shareholders if they listen to him.