Regulatory arbitrage

14Mar06

The topic du semaine seems to be the extraordinary debut of the NYX Group (NYX). Much of the chatter surrounds the frothy valuation the shares in the owner of the NYSE. This “overvaluation” and the ability to engage in “regulatory arbitrage” may make a deal for the LSE more likely now than would have been just a week ago. A few relevant links follow.

David Pauly at Bloomberg.com weighs in on the seemingly high valuations for NYX and speculates whether it will be forced to make a bid for the London exchange.

The Stalwart notes that a bid for the LSE is already having a positive effect on one company’s expense structure.

Doug Kass at TheStreet.com notes the analogies between NYSE Group and the Chicago Mercantile Exchange (CME) are flawed at best. Kass believes the NYSE Group is at best overvalued with positive catalysts already in the rearview mirror.

Daniel Gross at Slate.com draws a larger conclusion from the news that New York itself might be in its twilight as a financial center. The introduction of Sarbanes-Oxley may be forcing overseas firms to list in London (and elsewhere) but no on a New York exchange. In conclusion,

New York may still regard itself as the world’s financial capital, and justly so. But if current trends continue, it will be home to a smaller portion of the world’s capital.

Joe Weber at Businessweek.com notes the many potential suitors for the LSE. Weber also notes the Sarbox angle, but wonders whether the timing is off for the US based suitors.

David Reilly and Aaron Luchetti at the Wall Street Journal note a major holder of LSE shares is now more receptive to a takeover than it has been in the past.

The stars seem to be aligning for an NYX-LSE deal. Let’s recap the particulars.

A more receptive LSE shareholder base.
High relative valuation for NYX.
Scarcity value of LSE.
Opportunity to recapture listings going overseas due to Sarbox.

In the end what does it all mean? The particulars of any particular deal are not of all that much interest. What it does demonstrate is that in a more globalized world regulations do have an effect on where businesses will set up shop. The NYSE Group armed with its newly public shares may feel compelled to offset the regulatory constraints in its domestic market by diversifying overseas. Whether this makes sense financially is a whole other question, but from a managerial perspective it makes all the sense in the world.