Celebrity Wedding Deutsche Börse Eyes Takeover of New York Stock Exchange
Once again, plans are in the works for a mega-merger between the Deutsche Börse stock market in Frankfurt and the New York Stock Exchange. With the NYSE set to be swallowed up, many in the US are skeptical. A growing wave of such mergers could result in fewer national stock exchanges in the future.
Duncan Niederauer appeared as calm as could be. The CEO of the New York Stock Exchange Euronext spoke serenely about annual results, turnover and loss margins. He spoke of significant investments in 2010 and said that, "in short, we believe 2011 should provide a better environment for doing business."
Niederauer's telephone conference with nine market analysts on Tuesday morning lasted exactly one hour. But the most interesting item on the 50-year-old's agenda was kept under wraps. Niederauer and his team said nothing about it and the questions from the otherwise-excellently-informed analysts made it clear that they were in the dark.
It was only the next day that the NYSE made the sensational news public. The announcement came prematurely, the result of rumors flying around the trading floors in Manhattan and Frankfurt. Yes, the NYSE and its primary European rival the Deutsche Börse confirmed in identical statements, it is true that a fusion is in the works. It is a merger that would result in the largest stock exchange in the world.
Originally, the merger was to be announced next week as a fait accompli. The talks had been conducted in the strictest of secrecy, complete with codenames and highly confidential documents. Two earlier merger attempts, after all, had failed -- one in 2009 and another in 2009. And the size of the deal made the negotiations particularly sensitive.
Regulators Have the Final Say
But the whispering had become more audible in recent days, resulting in Wednesday's official confirmation of "advanced merger discussions." The statement noted that "no agreement has been reached" and warned that "there cannot be any assurance that an agreement will be reached or, if an agreement is reached, that a transaction will be completed." Regulators on both sides of the Atlantic will have the final say.
Such cautionary statements are, to be sure, routine, but very much appropriate. The deal, after all, would essentially involve a takeover of the NYSE by Deutsche Börse -- and would once again highlight the decline of the NYSE as a symbol of American economic might. "This is a heavy blow," remarked one trader on the floor.
Still, it seems unlikely that the fate can be avoided in the end. The planned market marriage between New York and Frankfurt is seen as an omen of a new international wave of consolidation which promises to exceed all earlier-such waves. Traditional national markets have an increasingly hard time competing with electronic trading platforms. The result is likely to be a future of larger, trans-national markets.
Since 2000, Bloomberg has calculated, there have been exchange mergers worth a total of almost $1 trillion. After a pause resulting from the global financial crisis, the trend has once again gained steam. "It's eat or be eaten," Ava Yaskiel, a mergers-and-acquisition lawyer with Ogilvy Renault LLP in Toronto, told the Wall Street Journal.
The London Stock Exchange (LSE) had hoped to dominate the headlines this week with its announcement of a merger with the Toronto Stock Exchange (TMX). Indeed, it was that merger which triggered the rumors of the NYSE-DAX marriage. The announcement by Niederauer and Deutsche Börse head Reto Francioni has now stolen the show.
"There is a race toward exchanges becoming ever bigger," Elie Darwish, an analyst with BNP Paribas, told the New York Times. The fusion, she said, would give Deutsche Börse and the NYSE Euronext an "unchallengable position."
Should the fusion become reality, it would result in a company with a value of $25.7 billion (18.9 billion) -- one which would dominate both the stock and futures markets in Europe and North America, with markets in Frankfurt, New York, Amsterdam and London.
For Deutsche Börse head Francioni the merger would represent a significant success after a long wait. He has attempted international fusions several times, but so far nothing has panned out. His efforts to flirt with the NYSE in 2008 and 2009 -- the working paper was codenamed "Rudolf" -- ultimately came to nothing.
Elements of the 13-page memorandum, however, are likely to be found in the deal currently under discussion: Francioni would become the chairman of the new entity, and would remain in Frankfurt. Niederauer would become CEO and would operate out of New York. The new firm would have an American-style board of directors, half of which would come from each company.
Consternation in New York
The talks of 2009 are said to have failed due to German fears of becoming little more than a branch of the NYSE, as largely happened to Euronext. That problem, however, looks to have been solved: Deutsche Börse stockholders are to receive 59 to 60 percent of the stock in the new company.
That, however, has resulted in consternation in New York. "The US shareholders lose their majority control," complained CNBC on Wednesday. UBS trader Art Cashin, an institution on the NYSE trading floor, also seemed unsure of the deal on Wednesday. He said that Niederauer's position as CEO would indicate that the NYSE would still have substantial influence. But, he complained, details of the looming deal are in short supply.
Still, many feel that the NYSE has a dark future should it remain solo. It is losing market share and classic stock trading is becoming less important. The attractive trading floor, constantly polished to a glistening shine, is a relict of the past and will soon disappear entirely.
The NYSE earnings statistics that Niederauer made public on Tuesday were anything but exhilarating. In the fourth quarter of 2010, profit was 21 percent lower than in the same quarter of the previous year, a result of the strengthening dollar and weak trade volumes on both continents.
'Just Say No'
"The listed exchanges are losing market share dramatically," former NYSE director Ken Langone said on CNBC, calling the proposed deal a "big yawn." "With electronic trading that is now prevalent throughout the industry, it seems to me the only sense for the merger is to cut costs faster than their market share goes down."
It is hoped that the proposed merger would save up to 300 million ($410 million) for the two companies. It is also to result in a greater presence in the global options and derivatives markets, where more money is now to be earned. A similar justification propelled the 2007 NYSE takeover of Euronext.
Before any deal could be finalized, however, antitrust officials would have to grant approval. Opposition would likely be stiff in the US: The idea that the NYSE, an American icon, would be taken over from abroad is difficult for many to swallow. Furthermore, a trans-Atlantic exchange could raise red flags when it comes to competition.
The same is true in Canada when it comes to the merger of the LSE and the TMX. There are several hurdles facing the deal in provinces such as Quebec and Ontario, but perhaps also in Canadian parliament.
"Exchanges are already too powerful," wrote financial analyst Jon Ogg on his blog 24/7 Wall St. "The world of financial exchanges could literally consolidate down into few players" with even fewer rivals. "When is enough enough?" His post ends with an appeal to regulators: "Just say no!"