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Trans-Atlantic Tease: Deutsche Börse Looks at Merger with NYSE

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The talks had long been kept secret, but Deutsche Börse AG apparently had plans to merge with the New York Stock Exchange. Now that the news is out, Deutsche Börse is saying the deal fell through. The plans, though, were highly developed.

The title was the most boring aspect of the internal paper that Deutsche Börse CEO Reto Francioni presented to his board of directors last week. It carried the codename Rudolf. The rest, however, sounded bold -- some would even say reckless.

Is there a merger afoot between the Deutsche Börse and the New York Stock Exchange?
DPA

Is there a merger afoot between the Deutsche Börse and the New York Stock Exchange?

Deutsche Börse AG, the paper indicated, has been considering a merger with New York Stock Exchange Euronext. The two companies want to join forces to create the world's leading operator of financial markets.

At a number of meetings on both sides of the Atlantic, Francioni hammered out the details with his counterpart in New York, Duncan Niederauer. The executive committee of Deutsche Börse even got as far as approving a 13-page memo that paves the way for continued secret negotiations.

The issue promises to dominate a Deutsche Börse supervisory board meeting on Monday. Many on the board have been kept in the dark about the closed-door negotiations. And in a statement on Sunday, Deutsche Börse said that while it was "constantly evaluating a multitude of options to enhance the value of the company," negotiations with NYSE Euronext "were concluded without any result."

Shares in Deutsche Börse rose sharply on Monday morning on the news and were up 7.4 percent in midday trading.

Leading Role in Global Markets

Still, one wonders if the plans are really off the table. Should Francioni, who hails from Switzerland, ultimately succeed in creating such a merger, the independence of the 423-year-old stock exchange in Frankfurt will be at stake -- with incalculable consequences for Germany's future as a financial center. In a number of areas, Deutsche Börse AG already plays a leading role in global financial markets.

Deutsche Börse runs the world's largest exchange for derivatives, handles more securities than any other institution in Europe, and will post record results this year -- despite the financial crisis. The company expects profits to exceed €1 billion ($1.27 billion) in 2008.

Aside from its big name, the NYSE has considerably less to offer. In New York telegenic, screaming traders still run across the stock exchange floor because the stock exchange took too long to shift to computerized trading. The market value of the company is only half as large as that of the exchange in Frankfurt.

Nevertheless, according to documents obtained by SPIEGEL, both negotiating partners -- Deutsche Börse (codename: Daphne) and NYSE Euronext (codename: Nero) -- foresaw acting as equal partners. The two sides envision a joint holding company in the Netherlands, which would then extend a takeover offer to shareholders of Deutsche Börse. In a second stage, the company would merge with a US subsidiary of the Dutch firm according to US law.

Most Profitable in the Country

The most recent debate centered on whether to actually establish the official headquarters of the new company in the Netherlands, where taxes are relatively low. But German authorities are already bracing themselves for the result of this transaction, which could lead to the loss of tax revenues from one of the most profitable companies in the country.

For the first five years, Francioni would reportedly hold the title of 'chairman' of this new super stock exchange, whose initial headquarters would be in Frankfurt. The actual work would be done by the American Niederauer, who would serve as 'chief executive' at the offices in New York. The two men would head a directorate with 16 other members, who would be selected in equal numbers from both companies. The eight members of the executive committee would also be equally appointed from both firms. Deutsche Börse executive board member Andreas Preuss has been proposed as the deputy chief executive of the new entity.

Additional functions would also be neatly shared by the two main offices in Frankfurt and New York. Securities trading would be managed from New York, using a number of European locations. Trading in derivatives would be directed from Germany, while settlements would continue to be managed from Luxembourg.

On paper it all looks like a marriage made in heaven, similar to the once-fabled merger between Daimler and Chrysler. But that's also how things looked 20 months ago when the NYSE joined forces with the pan-European stock exchange Euronext. "These days Euronext is a branch of an American company which is managed by Americans. The Americans totally dominate things there", says Frenchman Henri Lachmann, head of the supervisory board of the consumer electronics company Schneider.

Francioni and his advisers from Deutsche Bank informed hardly anyone of their ambitious plans. When asked to comment last week, Deutsche Börse said that it is "continuously" evaluating "a wide variety of options."

'Merger of Equals'

Managers at the German company know that the planned deal would be highly controversial. The German government is bound to be concerned about the prospect of Deutsche Börse engaging in a high-risk merger.

"The business model of Deutsche Börse is an extremely valuable asset that deserves our protection" Roland Koch, governor of the state of Hesse where Frankfurt is located, said in mid-November at a cornerstone-laying ceremony for the new company headquarters in Eschborn, near Frankfurt. Even the majority of the supervisory board members who are meeting on Monday know nothing about the plan. Until recently the main issue on the agenda has remained the resignation of the supervisory board chairman, Kurt Viermetz. Now, the Monday meeting will likely see a fair amount of resistence to the secret merger plans.

Viermetz, for his part, plans to present his own successor. That position will likely go to former DaimlerChrysler board member Manfred Gentz -- a man who knows from experience about the pitfalls of a "merger of equals."

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© SPIEGEL ONLINE 2008
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