On Friday, NASDAQ OMX Group Inc. (NDAQ) and
IntercontinentalExchange Inc.’s (ICE) initiative
to acquire NYSE Euronext Inc. (NYX) for $42.50 per
NYSE share in a joint bid blew in as a wind of change. The
transaction would be one-third in cash and two-third in stock,
making the deal worth approximately $11.3 billion. This is about
15% higher than the earlier proposed merger between NYSE and
Deutsche Boerse of $10.0 billion.
NASDAQ and ICE plans to finance the cash portion of the deal
through cash on hand and a combined financing of $3.8 billion.
Additionally, the proposal by the companies have been well-received
by a group of banks including Bank of America
Corp. (BAC) and Wells Fargo & Co.
(WFC) given the companies’ strong cash flows that ensures timely
repayment of the debt.
While ICE is expected to take over NYSE’s European futures
markets (Liffe, Liffe U.S.) and the over-the-counter clearing
business (NYPC), NASDAQ is expected to take care of the remaining
businesses of NYSE, such as the NYSE Euronext stock exchange in New
York as well as the U.S. options business. However, NASDAQ and ICE
will continue to operate their businesses as separate entities even
after the proposed merger.
Following the successful closing of the proposed NASDAQ-NYSE
deal, this transaction is expected to generate $1.8 billion in
revenues and create net synergies worth $740 million that will be
fully realized by the end of the third year. Moreover, the deal is
expected to be accretive within 12-18 months and will achieve
double-digit growth beyond that period.
Apprehensive About NYSE-Deutsche Deal
Since the NYSE-Deutsche merger announcement in February this
year, NASDAQ has been desperately hunting for a partner to make
counter-bid to acquire NYSE, in order to retain its market value
and strength in the industry.
NASDAQ fears that the culmination of NYSE-Deutsche deal will
diminish the former’s size and global footprint. The prospective
deal’s combined exchanges and clearing houses would generate an
annual €4.0 billion ($5.5 billion) in revenues, more than any other
exchange group.
Additionally, this would out beat all the exchange operators
with the largest derivative business, representing 37% of net
revenue against NASDAQ’s 17% of net revenue as reported in 2010.
Even the next biggest operator, CME Group Inc.
(CME) in the US, with €2.3 billion in revenues and holding 98%
market share of the US futures trading, would lag far behind the
NYSE-Deutsche combination.
While NYSE amalgamates several exchanges such as those in Paris,
Brussels, Amsterdam and Lisbon, NASDAQ owns the NASDAQ stock market
and the Scandinavian exchanges. A merger would help NASDAQ tap all
these European markets as well.
Diversion to Derivatives
Moreover, the rapidly developing infrastructure and technology
has pushed down the cost of trading and security in the exchange
industry. This has also been narrowing the ambit of expansion in
the equity stock trading, which was previously supposed to be the
primary business of the exchange operator. The industry has now
evolved to expand its growth opportunities by trading in the
futures and options or the derivative market.
For these reasons, NASDAQ has been losing its market share,
which is more concentrated towards equity stock trading. Hence, it
has made a joint bid with ICE that will be able to take over the
derivative business of NYSE.
Recently, the stock exchange industry has aligned itself with
the changing market needs and has consequently become a hub for
M&A activities. While London Stock Exchange (LSE) is on its way
to complete a merger with Toronto Stock Exchange owner TMX Group,
the Singapore Exchange and Australia's ASX is also undergoing
rigorous reviewing of its own merger plan.
Also, BATS, one of the most successful American stock exchanges,
completed its deal to buy Chi-X Europe to bolster its presence in
Europe early this year.
NYSE Bid: A Precarious Scenario
Meanwhile, the NYSE-Deutsche merger is facing intense probing
due to its anti-competitive vertical silo model. This is also
expected to delay the final execution of the deal, paving way for
other exchange operators to bid for NYSE.
However, a counter-bid in the NYSE-Deutsche deal appears to be
slightly restrictive since the agreement of the deal includes a
$337 million break-up fee in case the deal is spoilt by a new
bidder and tax issues, among others. Even a joint bid from NASDAQ
and ICE further involves lot of regulatory, political and
commercial hurdles, since merger of NASDAQ and NYSE would mean
erosion of competition in the industry as they both are the primary
peers.
Concerns about the bulk layoffs have been raised, which could
adversely impact the unemployment index. Alongside, the debt burden
associated with the proposed deal also drove rating agencies
Moody’s and Standards and Poor’s to down their outlook on NASDAQ
from stable to negative.
On the other side, though, the NYSE-NASDAQ merger is also seen
as an employment raising mode with increased capital gearing
coupled with enhanced transparency and liquidity.
This combination of the global top two exchanges would also
become one giant force in all major business lines by innovating
and uniquely handling competition, which are the intrinsic
qualities of a healthy business. The combination could also prove
favourable for ICE, who is also weighing its M&A options in the
ongoing industry furor.
However, we believe that uncertainty prevails over most of the
exchange operator’s future course of action. The sudden business
restructuring in the stock exchange industry reflects the rapid
need to respond to the changing dynamics of modern finance. These
are primarily driven by the increased demand for greater
international services and intense competition, which have led the
traditional exchange companies to dig in opportunities for gaining
scale and services.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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