The $17 billion mega merger between NYSE Euronext and Deutsche Borse has officially been rejected by regulators on the grounds that it would be anti-competitive.
“The merger between Deutsche Borse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide,” said commission vice president Joaquin Almunia in a statement. “These markets are at the heart of the financial system and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns.”
Following the decision, NYSE chief executive Duncan Niederauer said that he would contemplate all options, including voluntarily terminating the deal. An appeal of the decision is being considered, but only after all the facts from the commission’s judgment have been reviewed. He also announced that NYSE would go ahead with a $550 million share-buyback program after the company reports earnings later this month.
“While we viewed the merger as a way to accelerate our plans, our existing business model was always central to our strategy,” Niederauer said in a statement.
“Prohibiting the planned merger prevents the creation of a European-based, globally competitive exchange group,” said Reto Francioni, chief executive officer of Deutsche Borse said in a statement. “The merged exchange group would have been the ideal partner to European regulators when it came to providing support in establishing standardized, transparent and stable markets in Europe and worldwide.”
Both exchanges said today that they will continue on their other growth strategies, which include geographic as well as organic growth.
Deutsche Borse’s Eurex and NYSE’s Liffe are the two largest exchanges in the world for financial derivatives based on European underlyings. They compete head-to-head and are each other’s closest competitors. Together, the two exchanges would have controlled more than 90% of global trade in these products. The Commission’s investigation showed that the merger would have hindered new competitors from entering the space.
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 commission’s investigation concluded that exchange traded derivatives and over-the-counter traded derivatives are generally not considered as substitutes by customers, since they use them for different purposes and in different circumstances.
The commission’s summary of its decision also downplayed the similarities with the CME Group and its dominance in derivatives, stating that although they “provide similar services worldwide, they only do so marginally in the asset classes concerned.” The merger parties have often noted that combining would have put them on an even playing field with the CME on the global derivatives landscape.
Despite the failure of this high-profile deal, market participants and even rival exchange believe that this is not the death knell for exchange consolidation.
“I am not convinced that all cross border deals are in jeopardy, but clearly the EU sent a strong message to the exchanges under their watch,” Steve Hedger, head of trading at Fifth Third Asset Management, told Markets Media. “As a buy-side institutional trader, the failed merger will not have any dramatic consequences on how my traders access liquidity, but we are very happy to see that the NYSE will remain independent as we view them as an American Icon. We will be keeping a close eye on what will be unfolding in the near future.”
“I do not think it will preclude other large exchange deals from happening,” said Robert Greifeld, chief executive of Nasdaq OMX in a conference call on Wednesday.
The London Metal Exchange will likely be the next major candidate for consolidation, as its potential list of suitors has been narrowed down to just a handful of serious bidders, with CME Group, Intercontinental Exchange and the Singapore Exchange among them. The LME will consider the bids on the table on Feb. 23.
NYSE and Deutsche Borse agreed to their $17 billion merger, which would have created the largest exchange group in the world, in February 2011. Shareholders approved 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.