NYSE-DB to Push Forward

Terry Flanagan

With the cross-border merger between NYSE Euronext and Deutsche Borse hanging in the balance, the two exchanges will continue pushing for the deal’s approval.

While the European Competition Commission has kept the focus of its investigation on how the combined entity would have control of over 90% of derivatives trading in Europe, NYSE Euronext and Deutsche Borse have stressed that the merger would provide economic benefits to the struggling European economy as well as better position Frankfurt and Europe as a global economic power.

It would also put it on even ground with CME Group, which has dominated U.S. derivatives trading since the Chicago Mercantile Exchange merged with the Chicago Board of Trade in 2007. In addition, although NYSE would have a firm control of exchange-traded derivatives, only about 15% of derivatives in Europe are traded on exchanges, with the remaining 85% done on over-the-counter markets.

The chief executives of NYSE and Deutsche Borse, Duncan Niederauer and Reto Francioni, respectively, addressed a letter to the Commission last week noting that the rejection of the deal would be a missed opportunity for Europe to boost its financial standing amid the ongoing macroeconomic issues. They also said it would help to facilitate the EU’s financial regulation goals. The exchanges will also look to push for support for their merger at a World Economic Forum meeting in Switzerland in late January.

Although no official word from the EU Competition Commission has been given, reports surfaced that it would vote to block the $17 billion deal. The probability of the EU Competition Commission approving the merger is declining rapidly, UBS has pegged the probability of the deal going through at 20%.

“This deal was just too big,” said David Herron, chief executive of the Chicago Stock Exchange. “I think the LSE and TMX would have worked if the larger bid from Maple didn’t come out. NYSE merged with Euronext, that went through smoothly. It’s an issue when the government thinks a deal hurts competition.”

But with the fall of this deal, it may open the door to alternatives. “These big deals might get killed but it opens the door for smaller deals,” added Herron.

Speculation has noted that if the merger between NYSE and Deutsche Borse were to fail, it would leave both parties open for acquisition by other entities. Nasdaq, CME Group and the London Stock Exchange have each been rumored to be interested in making moves.

The chief executives of NYSE and Deutsche Borse, Duncan Niederauer and Reto Francioni, respectively, met last week to discuss the next steps to take in order to salvage the deal. They will look to lobby the remaining commissioners, industry leaders as well as politicians to approve the deal.

It is likely that the only way for the deal to be salvaged is if additional significant concessions are made. However, NYSE Euronext deputy chief executive Dominique Cerutti has recently said his company wouldn’t make any new concessions because that would threaten the business logic of the deal.

In December, the merger parties submitted a second round of remedies to address any remaining concerns. Among the proposed concessions was the divestiture all of the NYSE Liffe-operated European single equity derivatives business, including those in Amsterdam, Paris, Brussels and Lisbon. They will also offer to whoever ends up purchasing the single equity derivatives business access to Eurex Clearing.

Despite the new round of concessions, the commission’s main concern regarding the dominance the combined entities would have in European derivatives was not addressed. Combined, they would have control of more than 90% of European derivatives trading. Both parties have said that they would not include their Liffe and Eurex units in their remedies, citing that the merger would no longer make sense for them if they were asked to give up too much.

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 $17.7 billion merger in February, with shareholders approving the deal in July. Regulators outlined their objections in a statement in early October, with oral hearings held later that month. Their initial batch of remedies was submitted in mid-November. 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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