NYSE merger report raises fresh questions

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Citigroup has raised new questions about the New York Stock Exchange’s controversial decision to use Goldman Sachs to work on its merger with Archipelago by disclosing that Citigroup bankers had separately suggested the deal to the NYSE’s board. NYSE executives have justified the decision to use Goldman, despite potential conflicts of interest, on the grounds that a merger with Archipelago was Goldman’s idea.

However, in its fairness opinion on the merger delivered to the NYSE on Wednesday, Citigroup disclosed that “representatives of Citigroup had suggested that NYSE consider a similar transaction”. Related analysis was provided to the NYSE board, the bank said.

Citigroup’s fairness opinion, which confirmed that the deal was fair for NYSE members, included the revelation as part of the bank’s disclosures of its various relationships with the NYSE and Archipelago. The NYSE provoked a storm of criticism when, in announcing the merger in April, it stated that Goldman had acted as financial adviser to both Archipelago and the NYSE. Stan O’Neal, chief executive of Merrill Lynch, called John Thain, chief executive of the NYSE, to protest.

Goldman’s rivals were incensed that the bank had been given the prestigious role despite potential conflicts of interest. Not only did Goldman work for both sides, it also had a large stake in Archipelago, and Mr Thain was formerly the bank’s president.

In its defence, the NYSE pointed out that, contrary to the initial announcement, Goldman did not act as adviser to either side but merely as a “facilitator” for the transaction. For this it received a fee of $3.5m from each company. Goldman and Archipelago hired Lazard and Greenhill to provide advice and fairness opinions.

Marshall Carter, the NYSE’s chairman, told the Financial Times earlier this year that the Archipelago deal was Goldman’s idea, and so it would have been impossible to shut out the investment bank.

In a regulatory filing describing the background to the merger, the companies said that in late 2004 Archipelago asked Goldman to approach the NYSE about a possible deal. In response, Goldman contacted Mr Thain on January 5 to see if the NYSE would be interested in talks. The filing states that the NYSE was already contemplating potential deals, including the acquisition of Archipelago.

It is unclear at what stage Citigroup put forward the suggestion, or whether other banks also did so.

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