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NEW YORK/CHICAGO, Dec 8: The possible combination of exchange giants NYSE Euronext and Deutsche Boerse could unleash a wave of mergers as the industry prepares to tackle the over-the-counter market.
It would also shake the competitive balance among market operators in Europe and the United States.
German magazine Der Spiegel reported that the top US and German exchange operators are planning a merger, citing an internal paper it said Deutsche Bourse’s CEO presented to company management.
Together, the companies would run stock exchanges in Frankfurt, Paris, Amsterdam, Brussels, Lisbon and New York, and would handle the most US listed options volume by far.
Such a deal would create a mammoth exchange operator handling scores of products and boasting deep liquidity, but would face big regulatory hurdles, analysts said.
“The combination of these entities would give them access to markets and liquidity around the world which would be unprecedented,” said Jon Najarian, a founder of Web information site optionmonster.com.
“It would give them a competitive position that is potentially unassailable.”
Biggest deal ever?
If the report is true, a successful combination would likely represent the exchange industry’s biggest deal ever. At about $12.5 billion, Deutsche Boerse’s market capitaliSation is twice that of NYSE Euronext, which runs the New York Stock Exchange, the world’s biggest.
The combination would come as European and US regulators are looking for one or more central counterparties to handle credit default swaps, or CDS, which have been blamed for exacerbating the credit crisis that sharply undercut global stock markets this year.
The companies’ derivatives arms – NYSE’s Liffe unit and Deutsche Boerse’s Eurex unit -- have proposed competing solutions for the $47 trillion CDS market, which currently trades over the counter. The proposals have emerged as front-runners in Europe.
Analysts said that exchanges, which tout their transparency as a solution to problems on the private OTC markets, may have to bulk up in order to handle the load.
“The regulatory push to bring OTC contracts on to exchanges could trigger another round of consolidation,” said Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm specialising in exchanges.
“In order to address this, you need muscle.” Reuters has not confirmed the Der Spiegel report.
NYSE Euronext said it had no comment, while Deutsche Boerse said in a statement it was “consistently evaluating a multitude of options to enhance the value of the company,” but had nothing to announce.
The magazine said the deal would involve NYSE Euronext and Deutsche Boerse setting up a Dutch entity that would launch a takeover offer for the German exchange, which has been under pressure from activist investment funds to boost shareholder value.
A merger would create the world’s biggest securities and derivatives trading company, shuffling the competitive deck in equities, futures, options and clearing at a time when a growing number of alternative trading venues are eating away at the market share of older exchanges.
“If they can get it past the regulators, it would eliminate some competition in Europe,” said Richard Repetto, analyst at Sandler O’Neill, who noted that NYSE beat Deutsche Boerse in the 2007 battle to buy Euronext partly because its proposal had fewer regulatory hurdles.
“In reality, this one is exactly the same deal,” Repetto said.
Further complicating the possible deal, Eurex owns a 31.5 per cent stake in Direct Edge, the US equities platform that has aggressively shaved market share from NYSE.
“It can be done, but there would be a lot of hurdles to overcome to make this happen from a regulatory standpoint,” said Joe Kinahan, chief derivatives strategist at online brokerage Thinkorswim Group in Chicago.
“And that is not even taking into account the financial roadblocks.”
—Reuters
