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D.Boerse Unveils NYSE Deal, Now Faces Bumpy Road

17 February, 2011

Deutsche Boerse faces a long, hard struggle to get approvals from a host of regulators for its $10.2-billion takeover of NYSE Euronext to form the world’s largest exchange operator.

It is expected to take until the end of the year before the politically-charged deal, which was agreed on Tuesday, can go ahead. “We have a bumpy road ahead of us,” said Deutsche Boerse Chief Executive Reto Francioni, who would become chairman of the combined entity.

In a sign of the difficulty of keeping lawmakers and regulators on both sides of the Atlantic happy, the companies parked key questions that could threaten the accord. Foremost among those was what the merged company would be called.

“It’s an emotional decision for everyone, let’s just be honest about it,” NYSE Euronext CEO Duncan Niederauer, an American who would head the combined entity, told a press conference held jointly in Frankfurt and New York.

“There’s a lot of national pride particularly in the businesses we operate,” he said, adding the name would need to address political concerns on both continents.

The deal — packaged and sold as a merger of equals — accelerates a wave of tie-ups in the increasingly competitive and global exchange world, where companies are banding together and pushing into derivatives to survive and grow.

Deutsche Boerse shareholders will control 60 percent of the new company and 10 of 17 board seats. Still there are suspicions in Germany that NYSE management will be in the driver’s seat, in addition to concerns in the United States that the New York Stock Exchange will lose influence and independence.

That tension could raise political obstacles. Complicating things, the merged entity would dominate exchange-based European derivatives trading — raising difficult antitrust questions.

“People are worried there could be an extended fight,” said Frank Davis, director of sales and trading at Lek Securities in New York. “There may be some nationalistic posturing, especially on the U.S. side now that we know that the majority of board members will be German.”

The merged entity will have more than $20 trillion in annual trading volume, and operations spanning the United States, Germany, France, Britain, the Netherlands, Portugal and Belgium. Company executives stressed that the Big Board — the two-century-old icon of American capitalism — would not be harmed.

The deal values NYSE Euronext at about $39 a share. That’s 13 to 14 times the company’s expected 2012 earnings, and could be seen as cheap provided the merged entity can deliver on promises of growth and cost-cutting, analysts said.

A source familiar with the deal said 55 percent of the shareholders in the new company would be from the United States, with 11 percent from Germany, 11 percent from Britain and 23 percent from the rest of the world.

Under the terms of the deal, each NYSE Euronext share will be exchanged for 0.47 share in the new company; Deutsche Boerse shares will be swapped on a one-for-one basis, the companies said in a statement.

SEMANTICS

At the press conference, webcast in both English and German, Francioni argued that the deal “reshapes our entire industry,” and would strengthen the roles of both New York, as the financial capital of the world, and Frankfurt, as a European financial capital.

Though the tie-up is seen in part as a defensive move, Niederauer said it was “no act of desperation,” adding that he assumed it will be subject to a U.S. government foreign investment review.

Indeed, he said that the deal will put the merged company in a strong position to do deals elsewhere — making it “the inviter, the enabler, the convener with other exchanges in Asia and the developing world down the road.”

In one exchange with a reporter, the CEO said news media could help lawmakers understand the deal by calling it a merger. “I don’t know how many more times I have to say that,” Niederauer said. “And I guess each time I say that — you know I love you guys, but you keep saying it’s an acquisition.”

U.S. Senator Charles Schumer, who first raised the name issue over the weekend, has been insisting that NYSE should come first in the title of the group, which will have headquarters in both New York and Frankfurt.

Schumer reiterated those concerns after the deal was announced on Tuesday, calling the NYSE a “preeminent brand” and saying there was no reason for it not to come first. France has also expressed concerns over benefits that will fall to Paris.

There also remains a chance that some other U.S. exchange could get involved in a counterbid for NYSE. Officials from exchange companies CME Group Inc and Nasdaq OMX Group will meet to discuss a “strategy to respond” to the buyout deal, Fox Business Network reported on Tuesday.

Niederauer said he was aware of the rumor of a possible CME bid for NYSE but had heard nothing official, adding that the Big Board had signed a deal with a partner that it trusts.

The exchanges face intense competition in their traditional stock-trading business from newer trading venues geared toward today’s increasingly dominant high-speed electronic traders.

NYSE — created in 1792 by brokers and merchants who met under a buttonwood tree in lower Manhattan — is one of several exchanges that have responded by investing in technology and pushing hard into futures trading.

But the Big Board’s once dominant market share in U.S. equities trading has steadily dwindled in recent years, and NYSE Euronext shares are down 61 percent since early 2007.

Together, the companies dominate futures and options on European bonds, shares and rates, with Deutsche Boerse’s Eurex unit focused on the long end of the interest rate curve and NYSE Euronext’s Liffe unit on the short end.

“This merger — if approved — creates a true thousand-pound gorilla,” said Herbie Skeet, analyst at exchange consultancy Mondo Visione.

Shortly after the 90-minute press conference, the Frankfurt-based company reported a 16 percent fourth-quarter profit drop.

NYSE shares closed trading on Tuesday down 3.4 percent at $38.12, while Deutsche Boerse shares slid 2.4 percent. Given the time the deal will take to complete, NYSE’s shares are expected to trade below the offer price, unless another bidder emerges.

CONSOLIDATION WAVE

After a several-year hiatus that included the financial crisis and the beginning of a global regulatory revamp, the world’s exchange operators are back in the takeover game.

Singapore Exchange bid for Australia’s ASX late last year. And last week, London Stock Exchange said it would buy Toronto Stock Exchange operator TMX Group.

Both of those deals have already run into foreign ownership concerns, underlining the role nationalism plays in deals for countries’ capital-raising markets.

Regulators are paying close attention to the deals, and some traders have expressed fear that they will limit competition.

Deutsche Bank and JPMorgan Chase & Co advised Deutsche Boerse on the deal; NYSE Euronext’s main financial advisers were Perella Weinberg Partners and BNP Paribas.


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D.Boerse Unveils NYSE Deal, Now Faces Bumpy Road

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