NASDAQ may be in a hair-raising free fall, but that isn't stopping the high-tech stock market from marching toward its own IPO -- kind of like planning a wedding while your best friends' marriages are falling apart.
Timing is only part of the trouble, however. NASDAQ's plan to become a for-profit company -- and ultimately to go public -- was controversial long before its listed stocks started dropping off the cliff.What peeves the critics most is how shares of NASDAQ have been divvied up. It used to be one brokerage, one vote, at the electronic market. Now giants like Merrill Lynch and Goldman Sachs -- and newly invited owners, like Microsoft Corp. and Fidelity Investments -- will have far more voting shares than regional brokers.
Nobody wants to talk about exactly how many shares they got, shares that will one day become public shares.
A small but feisty contingent of brokerage firms is against the revamping of NASDAQ. John Goldsmith, chief executive of Freedom Securities Corp. in Boston, says he bought the shares that were allotted to Freedom. (Not to do so would be to cut oneself out of the picture altogether.) But he voted no for the reorganization.
"I am not of the school that this is a good idea," he says.
He and scores of others lost their protest vote Friday, as Wall Street's titans prevailed in a 3,423-to-652 contest. But their gripe remains: Who came up with this mysterious formula to dole out stakes in the nation's hottest -- if presently swooning -- market?
The eight fellows who did the math were part of what was called (no kidding) the "fairness committee." The group's chairman was Harvard University's Robert Glauber. The rest included a banker, an oil magnate and the head of an individual investors' association.
Another group, called the Baxter Committee -- dominated by executives from places like Merrill, Microsoft, Salomon Smith Barney, and Intel -- rubber-stamped the fairness proposal.
Some say the handing of the most power to the biggest players is no surprise. John Adams, chief of Adams, Harkness & Hill, a Boston broker and investment banker, says: "We got a fair shake." He argues that pure democracy doesn't help reward the firms most responsible for NASDAQ's success: "If Merrill took their volume somewhere else, it would hurt all of us a bit."
But there is plenty of debate over why NASDAQ needs to go public at all. The New York Stock Exchange is mulling an IPO as well. The exchanges say they need capital to compete with the upstart electronic exchanges. But is the strategy adequately thought out? As so many companies found out this week, going public is not just an opportunity to raise money. It comes with responsibilities to provide returns to investors.
Professor Sam Hayes of Harvard Business School observes: "I think there's a real problem with being a profit center and also a market regulator." He asks: "How can you keep those different roles separate but connected?"
NASDAQ's defenders retort that the watchdog role will be separate. But that is far from clear. The National Association of Securities Dealers, NASDAQ's parent, is a self-regulatory body financed by its members. It's a bit like a mutual bank owned by its customers -- in this case, the brokerage firms. Even after NASDAQ goes public, the NASD will own 22 percent of the stock market.
Is it possible to be a major NASDAQ owner and to be an unbiased regulator of its member firms? Consider this: Some current and former NASD regulators were part of the lobbying machine to get out the yes vote last week.
For NASDAQ to thrive as a public company, it must lose its image as a place rife with conflicts and power struggles. And to compete with other markets and electronic networks, it must run more like the businesses it lists.
"It's a world that's changing," says Richard Syron, the former American Stock Exchange chief who now is chairman of Thermo Electron Corp. and who helped merge Amex into NASDAQ. "It's moving faster because of the competitive environment and because of technology."
That's a huge challenge for NASDAQ's old guard.