Lawsuits have begun to crystallize around the proposed merger between IntercontinentalExchange Inc (NYSE:ICE) and NYSE Euronext (NYSE:NYX). Two individual lawsuits filed against NYSE Euronext allege that the share price agreed upon for the merger was too low.
The details of the law suits were released earlier today by the Wall Street Journal. The suits were filed by New Jersey Carpenters Pension fund and Samuel Cohen. The short article on the paper’s web site contends that some investors have made an industry out of suing firms in the shadow of mergers.
Because mergers can be severely slowed down by any and all legal action brought against their occurrence, firms are often more likely to settle these suits out of court for reasonable sums rather than face drawn out litigation. This makes them a prime target for large entities looking for a quick payoff.
According to the article in the Wall Street Journal, something similar occurred in 2011, when Deutsche Boerse AG (ETR:DB1) attempted to purchase NYSE Euronext (NYSE:NYX). A settlement that ended those law suits promised investors a $900 million super dividend if the deal was completed.
Unfortunately for those investors, that merger was blocked by the European Trade Commission in February 2012. That failure opened up room for a new merger, with IntercontinentalExchange Inc (NYSE:ICE), and of course an entirely new round of lawsuits.
IntercontinentalExchange Inc (NYSE:ICE) made an offer to buy NYSE Euronext (NYSE:NYX) on the 20 December in a deal worth around $8 billion. The deal valued individual shares in NYSE Euronext at around $33. The previous merger attempt valued the company at $39.
Before the announcement of the merger on December 20, NYSE Euronext (NYSE:NYX) stocks were languishing at almost 8% before their 2012 open. In the wake of the announcement of the IntercontinentalExchange Inc (NYSE:ICE) merger, the firm’s shares stand at around $32, almost 23% above their 2012 open.
The quick rise in the company’s share price caused Stifel Nicolaus to downgrade NYSE from buy to hold. Despite the quick increase in price, there was no increase in the value of the firm to shareholders. That report placed a price target of $32 on the firm based on the price offered in the deal.
The plaintiffs in the law suit against the NYSE Deutsche Boerse AG (ETR:DB1) merger included Samuel Cohen. It is clear that such lawsuits are a good bet for greater returns, should the merger actually transpire. There are clear difficulties for regulators, as evidenced by the European decision to block the Deutsche Borse merger earlier this year.
If this merger does come to pass, it is possible that it will be accompanied by a super dividend similar to the one tacked onto the DB deal. If the NYSE chooses to make a similar settlement in these law suits, and the plaintiffs chooss to accept them, a higher share price will almost certainly be the result.
It is clear from the repetition of plaintiffs in these cases, as demonstrated by the Wall Street Journal article, that there is some problem with mergers relating to NYSE Euronext (NYSE:NYX).
Either the company is systematically undervalued, or its shareholders feel management would rather promise future dividends in order to speed up a merger process. Either way, there is a distortion in the market, caused either by a less than efficient legal system, or a poor system for valuing the firm.