The Future of the New York Stock Exchange Is Far from Certain

LA Times: Nasdaq Counters Deutsche Boerse’s Offer to Buy NYSE
Nasdaq: Nasdaq, ICE Offer to Buy NYSE Euronext for $11.3 Billion
Crainsnewyork: The Problem with a NASDAQ NYSE
WSJ: Exchange Wars! Nasdaq OMX Offers Rival Bid for NYSE
AP: Nasdaq, ICE Make $11.3B Bid for NYSE Euronext
WSJ: Nasdaq Battles for Big Board

In the stock exchange industry scale is everything. This is precisely why over the past decade there has been a wide-spread consolidation trend among stock exchanges around the world. The latest chapter in this consolidation wave began in February 2011 when Deutsche Boerse announced its $10 billion all-stock bid to acquire NYSE Euronext, the parent company of the New York Stock Exchange. Approximately 60 percent of the new entity will be controlled by Deutsche Boerse’s shareholders, and the remaining 40 percent—by NYSE Euronext’s shareholders. The resulting company will be incorporated in the Netherlands, and its headquarters will be split between Frankfurt and New York. Although its name has not yet been finalized, the new company’s Chief Executive Officer (“CEO”) will probably be Duncan Niederauer, NYSE Euronext’s current CEO. Most importantly, after the merger the new company will be trading more stocks and futures than any rival in the world and more options than any other U.S. stock exchange operator.

The future of this proposed merger is quite uncertain, however, because last Friday Nasdaq OMX Group, Inc. (“Nasdaq”) and Intercontinental Exchange, Inc. (“ICE”) made an unsolicited $11.3 billion bid to acquire NYSE Euronext. This competing bid is 19 to 20 percent higher than Deutsche Boerse’s and offers a combination of cash and stocks to NYSE Euronext’s shareholders. Despite their joint bid, Nasdaq and ICE are not themselves pondering a merger, regardless of the outcome of their takeover proposal.

If NYSE Euronext accepts the bid, Nasdaq and ICE will split the target company into pieces. Nasdaq will acquire its stock exchange businesses in New York, Paris, Brussels, Amsterdam, and Lisbon, as well as its U.S. options trading business, while ICE will take over Liffe, NYSE Euronext’s London-based derivatives business. If the current bid is rejected, Nasdaq and ICE will likely make a better offer or may even make a public offer open to all NYSE Euronext shareholders (known as a tender offer).

Analysts point to several advantages of the Nasdaq-ICE bid. First, Nasdaq’s CEO Robert Greifeld vows to eliminate $740 million in annual costs by combining data centers and trading platforms while Deutsche Boerse estimates it would be able to cut around $423 million annually. Second, Nasdaq promises to keep both the company’s headquarters in New York and the iconic New York Stock Exchange trading floor. Third, Mr. Greifeld promises to name the new entity Nasdaq NYSE Euronext Group, thus alleviating some politicians’ concerns for keeping a reference to New York in the new company’s name. Fourth, the Nasdaq-ICE bid is much more likely to survive scrutiny by the European antitrust authorities than the merger between Deutsche Boerse and NYSE Euronext. Fifth, Mr. Greifeld believes that the merger will increase transparency and liquidity in the U.S. markets and will create jobs as new companies raise capital.

At least for some experts, the bidding war is far from over. Deutsche Boerse is now likely to make a more attractive counterbid. Another stock exchange operator, such as the Chicago Mercantile Exchange, may also decide to participate in the bidding for NYSE Euronext, a probable move considering how lucrative its derivative-trading business is. Some analysts even envision a scenario under which Nasdaq itself may become the target of a hostile takeover bid.