The World from Berlin: Price of Exchanges Merger 'Would Have Been Too High'

It's back to the drawing board for stock exchange companies Deutsche Börse and NYSE Euronext after the European Commission blocked their merger plans. German commentators ask if the megal-deal was even a good idea in the first place.

The Frankfurt stock exchange. European Union regulators have blocked the planned merger of exchange operators Deutsche Börse and NYSE Euronext. Zoom
REUTERS

The Frankfurt stock exchange. European Union regulators have blocked the planned merger of exchange operators Deutsche Börse and NYSE Euronext.

Wednesday was "a black day for Europe and for its future competitiveness on global financial markets" -- at least if Deutsche Börse is to be believed. That's how the Frankfurt-based stock exchange operator reacted to the news that its planned merger with NYSE Euronext had been vetoed by EU antitrust regulators.

Investors, however, seemed unperturbed by the news. On Thursday, shares in Deutsche Börse were even up by over 4 percent at times, trading above €47 ($62), amid expectations that the company would return cash to shareholders. NYSE Euronext's shares fell by just 0.5 percent on Wednesday. The consequences of the failed merger are not as bad as the companies would like to paint, it seems.

Announcing its decision on Wednesday, the European Commission, the EU's executive body which is also responsible for regulating competition within the bloc, argued that the combined company would have had too much power over trading in European derivatives. Together, the two companies control more than 90 percent of the trade in European exchange-traded financial derivatives through their Eurex and Liffe exchanges. The firms argued in return that a large portion of the trading in derivatives does not take place on exchanges, but in direct or over-the-counter (OTC) trading between banks.

The two potential merger partners had tried to save the multi-billion euro deal, which was originally announced in February 2011, by offering to divest their overlapping businesses. Antitrust officials had previously said that the two companies would have to sell off an entire derivatives business, but the exchanges clearly weren't prepared to go that far.

On Thursday, German media commentators generally have scathing words for the failed merger.

The center-left Süddeutsche Zeitung writes:

"The true value of a planned merger can be seen only when the deal collapses at the last minute. Deutsche Börse and NYSE Euronext had insisted that they didn't just want to merge -- they claimed they had to. The survival of the two companies depended on it -- that's what the two CEOs effectively said a year ago when the merger plans were announced."

"The $9 billion deal would have produced the world's largest stock exchange. The idea was to set up a Frankfurt-Wall Street axis as a bulwark against Asian competition. Everyone was supposed to benefit from the deal … and the executive boards and shareholders were all convinced that it had to happen."

"And now? Is Deutsche Börse or its New York rival in danger of economic collapse now that the merger has been blocked? The two CEOS, Reto Francioni and Duncan Niederauer, who apparently cared so much about the trans-Atlantic merger, may be disappointed, but their response to Wednesday's decision was full of defiance: The merger isn't going to happen? Never mind, we can do very well by ourselves."

"We could be forgiven for asking in return: In that case, why did they put so much effort into preparations for the deal, lobbying and advertising campaigns over the last few months? Were the egos of the two managers bigger than the expected gains?"

The center-right Frankfurter Allgemeine Zeitung writes:

"From the first day on, this newspaper argued at length that the merger would bring more disadvantages than advantages for Deutsche Börse. Just preparing for the merger consumed a lot of effort and money and meant that the real work of developing the company was put on the back burner. A trans-Atlantic integration process would have caused this situation to continue for years, given the considerable resentment on both sides of the Atlantic. The benefits of the merger -- mainly cost savings -- were just calculations on paper and had yet to be subjected to the real-world test."

"For the European stock exchange landscape, it is therefore an advantage that the continent's largest exchange company will retain its independence. Deutsche Börse is well enough positioned to compete on its own. It has significant opportunities to develop in terms of shifting OTC trading onto exchange platforms. And even without the Americans by their side, they should not shy away from trying to get a bigger foothold in emerging economies. If it were to enter into technology partnerships with stock markets in those countries, then Deutsche Börse would become really strong."

The Financial Times Deutschland writes:

"The European Commission's decision to veto the merger between Deutsche Börse and its trans-Atlantic rival NYSE Euronext is no great drama for the Frankfurt-based company. It's true that the list of its failed merger plans is a long one -- almost embarrassingly so -- and it just got longer."

"But even without a merger partner, the company is well positioned, because it is present in the whole securities trading value chain and can collect fees everywhere. That includes classic stock trading, which is currently a source of particular pleasure to Deutsche Börse because the financial crisis has increased the speed of trading and therefore boosted revenues. It also includes the booming trade in derivatives, in the shape of Deutsche Börse's subsidiary Eurex -- the sticking point that caused the deal with NYSE to collapse."

"All in all, Deutsche Börse may have missed a chance to become even bigger. But the price it would have had to pay -- for example, selling off Eurex to placate Brussels -- would have been too high. In the meantime, the company can grow under its own steam."

In a guest editorial for the business daily Handelsblatt, Christine Bortenlänger, the CEO of Munich Stock Exchange, writes:

"What is at stake here is not just the position (of the companies) in terms of global competition. It is also about the importance of the exchanges as actors in the powerplays on the financial markets. As important as it is to prevent cartels and to support the free market, a strengthening of exchange-based trading would have been a much needed and very timely signal, especially against the backdrop of the financial crisis and calls for greater regulation of financial markets. Exchanges provide maximum transparency and ensure fair and transparent pricing."

"It has long been a fact, however, that large segments of the securities trading business are handled outside the strictly regulated exchanges. The biggest competitors of NYSE and Deutsche Börse are not just the emerging exchanges in Asia, but also over-the-counter (OTC) trading between the major investment houses …. In derivatives trading, for example, OTC trading accounts for between 80 and 90 percent of the market. For this reason alone, it is difficult to understand why the EU assumes a merger would have led to a dominant position in this area."

"The commissioners' decision is a decision in favor of a provincial and anachronistic isolation of Europe from the world. That's something that an export-oriented country like Germany can not support. It's time that the EU thought beyond its own borders, and thinks of itself as an important region on the global scale -- and also acts in a way that is open to the world."

The left-leaning Die Tageszeitung writes:

"Many investors were actually relieved that the mega-wedding was prevented. After all, it was not clear whether a merger would have paid off. It would have required enormous investments, until the famous synergy effects possibly appeared at some point. But Deutsche Börse didn't even need to take such risks: Their profits are rising rapidly, and their profit margin is already over 50 percent. Other companies can only dream of such figures."

"Deutsche Börse's enormous profits are a signal, however, that competition between exchanges is not working. Otherwise, Deutsche Börse would not reap such monopoly-style profits. This leads to a fundamental question: Does it even make sense for stock exchanges to be organized as private companies? They have a central economic function by providing a market for financial products."

"This economic importance will continue to rise in the future. Until now, many financial transactions have been handled 'over the counter' -- in other words, directly between banks. But since the financial crisis, it has become clear that all transactions should be handled on exchanges. The risks must be visible, and nothing is as transparent as a standardized market. Ultimately this means that we need a stock exchange monopoly -- and only the state can hold a monopoly."

-- David Gordon Smith

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