The Wall Street Journal-20080206-Synergy Delay- NYSE Cites Snags in Euronext Union

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Synergy Delay: NYSE Cites Snags in Euronext Union

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New York Stock Exchange parent NYSE Euronext, the world's largest stock-market operator, is finding out how hard it is to build top- notch trading systems and aggressively cut costs at the same time.

The company's shares yesterday fell 14%, their steepest percentage decline since going public in 2006, with investors disappointed by NYSE Euronext's acknowledgment that it will take nine months longer than expected to wring $250 million in technology-related savings from last year's merger of the NYSE and Euronext.

For anyone "thinking the synergies would come earlier and bigger, this puts a dimmer" on the idea, said Richard Repetto, analyst with Sandler O'Neill & Partners.

The stumble also puts more pressure on Duncan Niederauer, who took over as chief executive at NYSE Euronext after predecessor John Thain left last fall to run Merrill Lynch & Co.

Mr. Niederauer already had inherited the formidable tasks of integrating technology and cutting costs, but yesterday's announcement underscores the challenges of combining various trading platforms with widely varying strengths and weaknesses.

In recent months, Mr. Niederauer and other senior NYSE Euronext executives have decided to bring more trading technology inside the company, instead of outsourcing it to partially owned subsidiaries. NYSE officials say the decision should allow the exchange to grow more rapidly in the future, accommodating unexpected surges in trading activity similar to those seen since the stock market turned lower last year.

But those moves mean that the company won't hit its $250 million cost-savings target until the end of 2010, instead of its previous projection of that year's first quarter. "I'm very cost-conscious. I have my arms around it," Mr. Niederauer said, adding that the company expects to save $20 million more than anticipated this quarter from technology.

In a conference call with analysts, other challenges arising from blending two far-flung companies were evident. When J.P. Morgan analyst Ken Worthington asked about the company's expenses, NYSE Euronext Chief Financial Officer Joost van der Does de Willebois started to respond -- but then ceded the floor to technology chief Lawrence Leibowitz, who was on the conference call from Mumbai, India.

When Mr. Worthington asked another question, he couldn't understand the answer given by deputy CEO Jean-Francois Theodore. "I missed the first part of the comments because of the accent," the analyst said. Before answering with Mr. Theodore, Mr. Niederauer responded: "We're a global company, Ken, so you're going to have to get used to some of the accents."

The cost-savings delay overshadowed a surge in fourth-quarter profit as NYSE Euronext benefited from the April 2007 merger and higher trading volume.

Meanwhile, Chicago Mercantile Exchange parent CME Group Inc. reported a 95% jump in net income to $201 million; revenue rose 88% to $530 million.

CME faces fewer technology hurdles than NYSE Euronext, partly because the Chicago company has run its own systems for years, building them to accommodate faster speeds and absorb new projects. The exchange has already integrated the electronic trading of the Chicago Board of Trade, which CME bought last year.

"Everything here is driven by technology," said Craig Donohue, CME's CEO. Owning its own technology "gives us the ability to control things our customers care most about." Other exchanges "still in the building process" have a harder time growing while keeping expenses in check, he said.

Separately, CME remains in exclusive talks to buy the New York Mercantile Exchange's parent, Nymex Holdings Inc. But concerns are rising that such a deal may prompt a tough antitrust review. The Justice Department wrote to the Treasury Department recommending changes that could hurt the CME's lucrative control over the business of clearing financial-futures trades.

In 4 p.m. New York Stock Exchange composite trading, NYSE Euronext was down $11.70 to $71.03. CME was down $30.20, or 4.9%, to $588.80. Both companies' shares have fallen on concerns a stocks bear market could slow trading.