NYSE-DB Look Ahead

Terry Flanagan

With the cross-border merger between NYSE Euronext and Deutsche Borse in doubt, the two exchanges will need to consider alternative avenues for expansion.

With the European Competition Commission’s deadline for its decision on the merger between NYSE and Deutsche Borse around the corner, both parties have expressed that they would continue to seek out further growth initiatives, regardless of the decision.

Deutsche Borse chief executive officer Reto Francioni said that the company would forge ahead with “organic growth,” whether or not the deal is approved. His NYSE counterpart, Duncan Niederauer, has said that it would continue to look at smaller, bolt-on acquisitions going forward, including the London Metal Exchange, the world’s largest metal exchange, and LCH.Clearnet, one of Europe’s largest clearing houses.

Exchanges have sought out M&A activity in an increasingly competitive and fragmented global market, where new rival exchanges, alternative trading systems and dark pools have spread out order flow. Consolidation was a step taken to rein in fragmentation. “In a globalized economy, exchanges must go global as well,” said Francioni of the transaction, late last year.

With nearly all of the major exchange deals from the past 12 months scuttled, some due to regulation or lack of shareholder support, it appears likely that the days of the cross border mega merger are numbered. Regulators have made it clear that they would put potential deals under the microscope and pay particular attention on the effects they would have on competitive balance.

It is largely expected that when EU Competition Commission head Joaquin Almunia meets with his fellow commissioners on Feb. 1, he will recommend blocking the proposed $17 billion merger between NYSE and Deutsche Borse. However, a glimmer of hope still remains as Michel Barnier, the European Union’s financial services chief, plans to seek a debate among his fellow commissioners as to the merits of the deal, according to reports.

The chief executives of NYSE and Deutsche Borse, Duncan Niederauer and Reto Francioni, respectively, have been actively lobbying European politicians, financial heads as well as the remaining commissioners to approve the deal.

The Commission has noted that they were highly concerned about the dominance that the combined entity would have on European exchange-trade derivatives. It has been suggested that the only way they would consider the deal is if one of the two companies’ main derivatives platforms, Liffe or Eurex, were divested. Both companies have said that it wouldn’t be feasible to continue with the deal if they had to give up too much.

Combined, they would have control of more than 90% of European derivatives trading. NYSE and Deutsche Borse have countered by stressing that they would only have a firm control of exchange-traded derivatives, which accounts for just 15% of derivatives in Europe, with the remaining 85% done on over-the-counter markets.

The U.S. Department of Justice in late December gave the green light on the proposed merger, contingent on the International Securities Exchange, a unit of Deutsche Borse, divesting its stake in Direct Edge.

NYSE and Deutsche Borse agreed to their merger in February, with shareholders approving the deal in July. The companies expect to save as much as $3 billion in capital requirements through the deal, as well as reduce any duplicative infrastructures and operations.

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