CME CME Group Inc

In a dramatic turn of events, yesterday NYSE Euronext Inc. (NYX) discarded the proposed takeover bid made by NASDAQ OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE), citing multiple concerns.

The NYSE management cited that it is not interested in splitting up the company’s business while also extending additional debt burden on it, thereby posing ample execution risk on the company. Simultaneously, NYSE continues to work towards its acquisition by Frankfurt-based Deutsche Boerse AG announced in February this year.

Last week, NASDAQ and ICE had offered $43.13 per NYSE share in a joint bid, one-third in cash and two-third in stock, totaling to approximately $11.3 billion. This was about 15% higher than the earlier proposed merger between NYSE and Deutsche Boerse of $10.0 billion. NASDAQ and ICE had planned to finance the cash portion of the deal through cash on hand and a combined financing of $3.8 billion.

While ICE was expected to take over NYSE’s European futures markets (Liffe, Liffe U.S.) and the over-the-counter clearing business (NYPC), NASDAQ was expected to take care of the remaining businesses of NYSE, such as the NYSE Euronext stock exchanges in New York, Paris, Brussels, Amsterdam and Lisbon as well as the U.S. options business.

The Multiple Concerns over NYSE-NASDAQ

Although offering a deal of much higher value, NYSE elucidated on the various regulatory, political and commercial hurdles that the NASDAQ-NYSE merger could pose. These include loopholes in NASDAQ’s financing commitments along with its potential debt burden that would be mounted following the deal.

Also, the debt burden associated with the proposed deal also drove rating agencies Moody’s and Standards and Poor’s to lower their outlook on NASDAQ from stable to negative last week.

Moreover, the proposed merger of the two big giants in the US would pose antitrust problems since the merger of NASDAQ and NYSE would mean erosion of competition and give way to a monopolistic structure. Additional concerns about the bulk layoffs have also been raised, which could adversely impact the unemployment index.

Any counter-bid in the NYSE-Deutsche deal also appears 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. Hence, given these multiple risks associated with the deal, the board of NYSE decided to turn down NASDAQ and ICE’s joint bid.

NYSE-Deutsche Deal Hailed

Although the NYSE-Deutsche deal is lower in value, NYSE believes that its merger with Deutsche Boerse is well positioned to yield effective long-term synergies, making it a leading exchange operator in both scale and strength. The two parties are also confident of achieving the regulatory approval in Europe even though the chase is intense and time-consuming.

This strategic combination is further projected to create significant growth opportunities from the rapidly growing Asian and Latin American countries. With more than 18 million contracts traded per day and the only clearing house offering real-time position monitoring, the merged group will be the leading provider of the latest technology, market-data and information services through its sound infrastructure.

As a result of these factors, the merger is expected to become a capital generating hub with the highest market capitalization considering the next four leading exchange operators. The deal is expected to close by the end of this year.

Still Apprehensive on NYSE-Deutsche Deal

On the other hand, NASDAQ has been desperately hunting for a partner to make counter-bid to acquire NYSE since the announcement of the NYSE-Deutsche merger, 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.

However, even a $1.3 billion appreciation in the deal could not cast a spell on NYSE. Meanwhile, NASDAQ and ICE showed disappointment by claiming that NYSE is denying its shareholders the maximum return by disregarding their bigger offer. Hence, both NASDAQ and ICE are expected to discuss this case with the investors.

Industry Trends

Recently, the stock exchange industry has aligned itself with the changing market needs and has consequently become a hub for M&A activities. More than $20 billion of proposed acquisitions have been announced in the last six months.

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 rigorously reviewing of its own merger plan.

 

Overall, 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 pressing 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.

 
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