Nasdaq up for sale

Nasdaq up for sale
Elizabeth Smith

New York, April 15: The National Association of Securities Dealers (Nasdaq) on Friday said its member firms voted resoundingly to sell off the Nasdaq, the No 2 US stock market.

The NASD, a non-profit group of stock brokerage firms that dates back to the 1930s, built the Nasdaq in 1971 as an electronic quotation system for broker-dealers to trade stocks over the counter. Since then, it has grown into a formidable market that now is the chief rival of the New York Stock Exchange, the world's largest exchange.

The Nasdaq market, the home of the Nasdaq composite index, is where the shares of some of the world's biggest technology companies, such as Microsoft Corp and Cisco Systems, are traded.

The vote clears the way for the NASD to sell off its crown jewel through a two-step private placement of stock estimated to generate more than $1 billion, with the first phase priced at $11 a share. The endorsement came a day after some dissident NASD brokers went to court in an effort to stop the balloting.

A private placement also sets the stage for an initial public offering of the Nasdaq, the nation's largest electronic stock market, though an IPO isn't part of the current plan. One last hurdle remains, though. The US Securities and Exchange Commission must approve the Nasdaq's plans to become an independent company by deeming it an exchange, a status it has never enjoyed. "The numbers are very impressive," NASD Chairman Frank Zarb said, after the NASD vote, from his cell phone in his car on Friday. "It's a mandate. And remember that the majority of our firms are small broker-dealers."

The NASD consists of about 5,500 member firms, ranging from Wall Street's most powerful securities firms to one-man shops. The group includes small and medium-sized brokerages scattered throughout the country.

A total of 3,423 NASD member firms -- or 84 percent of those who voted -- approved the Nasdaq spin-off, while another 652, or 16 percent, opposed it. There were 110 firms that abstained from voting. On Friday, the NASD tallied the votes, after a meeting in the St. Regis Hotel in Washington, DC, and announced the outcome shortly thereafter.

NASDAQ IPO EXPECTED: The new directors of the NASD will decide on an initial public offering, most likely, later this year, Zarb told reporters during a conference call with reporters. "No determination has been made on that question yet," he added.

The outcome of the vote capped 18 months of work for the NASD's top executives, who had lobbied hard to push through their plan. Led by Zarb, they argued that that the spin-off will disentangle the for-profit Nasdaq from its non-profit parent and supply it with cash to stay competitive.

The Nasdaq needs the cash to pay for technology so it can compete more effectively with upstart electronic trading systems. These are the off-exchange electronic communications networks, or ECNS, which have proliferated in recent years. ECNs often are no more than a bunch of computers in an office, matching buy and sell orders for stocks.

The NASD is set to sell 47 per cent to 49 per cent of the Nasdaq in May during the first phase of the private placement. It will offer shares to its member firms on a weighted basis, along with the top 130 top-listed Nasdaq companies.

In the second phase that is set to take place this fall,the NASD will sell more shares, until it is left with only a 22 percent stake in the Nasdaq. Spun off as its own company, the Nasdaq will have investor shareholders, instead of being governed by an organisation of 5,500 members.

As part of the plan, the NASD will set aside about $ 500 million to modernise the NASD's regulatory arm, the NASDR. Another $ 215 million will be earmarked to develop another NASD subsidiary, the American Stock Exchange, which the NASD does not plan to sell, while $114 million will be used to cut member fees over the next seven years.

The NASD already has spent some big bucks on high-powered help to put together the deal. The law firm Skadden, Arps, Slate, Meagher & Flom hammered out the legal details. Investment bank Salomon Smith Barney, a unit of Citigroup Inc, worked to assign a value to the shares, while JP Morgan & Co, assessed the fairness of the deal for small member firms.

Opponents of the plan went to court on Thursday in an attempt to block the NASD from counting the votes. The Independent Broker-Dealer Association, headed by Alan Davidson, filed a motion for a temporary restraining order in New York Supreme Court. A judge denied the request but scheduled a hearing Monday,when the plaintiffs will be permitted to argue why the private placement should not proceed.

In a statement entitled "A Death Warrant," Davidson said NASD members voted favourably on the Nasdaq spin-off because they feared retaliation from the NASD's regulatory arm, the NASDR. Davidson, president of Zeus Securities in Smithtown, NY, also said that holding a vote without a secret ballot clashed with the NASD's bylaws.

And he took aim at Zarb. "Immediately following the vote count, Frank Zarb, Nasdaq CEO, could hardly wait to announce that Microsoft could now trade 24 hours a day," Davidson said in his statement. "How will NASD members, who have no presence overseas, compete?"

The NASD's chief legal officer, Ed Knight, said the law suit was "baseless," adding that the NASD broke none of its rules in the way it held the vote. Davidson's suit went so far as to name former U.S. President Gerald Ford, an NASD board member, as a defendant, Knight said.

Several NASD board members representing small member firms broke ranks with Davidson over the issue. "The members have proven that they want to be part of the future of the new market," said LaRae Bakerink, who heads compliance at Pacific-American Securities in San Diego and the California Association of Independent Broker-Dealers.