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SOMETHING VENTURED: Another Look At the GTCR-Amex Deal

June 2003

SOMETHING VENTURED: Another Look At the GTCR-Amex Deal

By Kopin Tan
26 June 2003
Dow Jones News Service

NEW YORK (Dow Jones)--At $110 million, GTCR Golder Rauner's agreement to buy the American Stock Exchange is hardly a large deal, but it caught the attention of both the securities industry and the private equity world. 

Among U.S. stock and option exchanges, the deal is evidence of interest from private equity firms that are flush with capital. With U.S. option exchanges under pressure to consolidate, cut costs and make expensive technological changes, the success of a GTCR-Amex deal could open the doors for other such investments. 

Among buyout firms, the Amex represents an atypical acquisition target. Buyout firms most often zoom in on private companies that can be grown and then taken public or sold, or even undervalued public companies that need capital. But the Amex, which trades stocks and options, is heavily regulated by the government; and with 864 seat holders and members who can't always agree, steering it is about as simple as getting a fleet of small ships to change course together in a storm. 

For now, little is known about GTCR's precise plans for the Amex, even among Amex members who must vote to approve the GTCR buyout. The National Association of Securities Dealers, which owns the Amex but is selling it to focus on its regulatory function, is expected to reinvest the $110 million into the exchange. Officials at GTCR, which is finalizing the deal, did not return a call at press time. 

To be sure, GTCR's interest in the Amex may be unusual among buyout firms, but it isn't farfetched, market watchers say. Buyout firms are sitting on an estimated $90 billion raised in recent years but which have yet to be invested; the increased competition for deals has driven many firms to consider more unusual targets or industry sectors, bankers and private equity firms say. 

"As a government regulated exchange, the Amex's consistent cash flow is what looks good to private equity firms now that they are less likely to find a great growth story," says Rafi Musher, chief executive of Stax Research, which helps private equity firms conduct due diligence and helps them screen for targets. 

Also, "the buyout deal market has become very polarized," says Ed Bagdasarian, a managing partner at Barrington Associates, an investment bank that works with many buyout firms. "You have the high-quality deals that will attract many bidders, and then you have the more marginal or tougher deals" that firms looking for an edge increasing are considering. 

The heavy government regulation and the deal's complexity - due, in part, to veto rights Amex members have over certain structural changes - is a challenge for GTCR but can work for the firm as well. "The regulation, for example, can create an entry barrier keeping other potential competitors out of this market," Bagdasarian says. 

Another issue is the presence of other parties, from members to management to the Securities and Exchange Commission, in addition to the buyer and seller. "There are multiple constituencies to deal with, each with their own views and interests," says Stephen Ritchie, a Kirkland & Ellis partner and a lawyer who has worked with GTCR. "It becomes a multiparty negotiation, and not everybody is willing to take on that challenge." Bankers say these problems can scare away other would-be suitors and benefit GTCR at the bargaining table; indeed, the NASD had shopped the Amex around for more than two years with little success (although it did reject repeated offers to discuss a deal from the Chicago Board Options Exchange). 

A More Electronic Future?

For now, it isn't known what GTCR plans to do to steer the Amex to success, preferably within the usual buyout firm time horizon of less than five years. But bankers and private equity professionals say GTCR must logically convert at least part of the floor-trading process into the electronic realm - the most obvious and viable way to extract value in the short term. 

Currently, investors and brokers looking to buy or sell options route their orders to the Amex trading floor, where larger orders are filled manually by the Amex's specialists and market makers. As electronic exchanges begin to siphon away market share in recent years, the Amex, like other floor-based exchanges, have been adding electronic elements, although members still balk at any move that might threaten the existence of the trading floor. 

But GTCR, and the Amex, may not have much of a choice. "As competitive pressures continue to drive down the prices for trades, it makes it increasingly difficult for a low-volume, non-electronic exchange to make money," said Ken Marlin, a managing partner at Marlin & Associates, an investment bank that specializes in financial technology and media deals. The Amex's successful business listing exchange-traded funds is facing growing competition, while it has recently lost its spot as the nation's No. 2 option exchange to the electronic International Securities Exchange. 

Other risks exist, too, bankers and market watchers say. Regulatory rules about who can own U.S. exchanges are still evolving and less than clear-cut. This can substantially affect GTCR's exit strategy and may limit parties to which the firm may one day sell the Amex when that time comes. 

Not A Huge Departure For GTCR

A look at GTCR's track record sheds some light as to its affinity for the Amex. The firm essentially raises money from investors like pension funds and university endowments, that is then invested in companies. Its portfolio has more than $4 billion invested in more than 50 companies, and since 1980 it has taken at least 33 companies public. It started life as Golder Thoma Cressey Rauner, but the departure in the 1990s of Thoma and Cressey to start their own outfit resulted in the firm now known as GTCR Golder Rauner. 

The Chicago firm has invested in diverse sectors from funeral homes to power generation and transmission, from Internet services to pharmaceuticals. But one area it has invested in and become familiar with is transaction processing and payments, parallels of which can be drawn to the trade processing that occurs at a securities exchange albeit on a far larger scale. 

Among GTCR's well-known modus operandi is the "roll up," essentially where the firm acquires a company as a platform before piling on smaller acquisitions called "add-ons," all the while consolidating costs while trying to achieve critical mass. Several market watchers say they would not be surprised to see GTCR look for merger opportunities among regional stock exchanges and electronic communications networks, or among option exchanges struggling to grow. 

Given how many suitors have walked away from the Amex over the past two years, and how desperately the NASD wants out, what does GTCR have that the others don't? "Perhaps what they bring is a combination of a vision, a willingness to take that capital risk, and also a time and desire to focus on this and try and make it work," Marlin adds. 

GTCR is still working out details of the deal. A date has yet to be fixed for Amex members to vote. 

By Kopin Tan, Dow Jones Newswires; 201-938-2202; kopin.tan@dowjones.com

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