The Risky Business of Stock Exchange Mergers

It's our opinion that neither merger proposal on NYSE Euronext's table is without risks

Michael Wong, CPA 13 April, 2011 | 9:53AM
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Late last week, the board of directors for NYSE Euronext (NYX) unanimously reaffirmed its merger agreement with Deutsche Boerse (DB1) and rejected the proposed merger agreement by Nasdaq OMX Group (NADQ) and IntercontinentalExchange (ICE). The key points that NYSE Euronext hit upon were that the Nasdaq-IntercontinentalExchange deal would create less long-term value for shareholders, is less likely to close, would burden the combined company with high levels of debt, destroys human capital, would be a strategic mistake in terms of where global markets are headed, and has too much execution risk. We don't anticipate any material change in our fair value estimate for NYSE Euronext, Deutsche Boerse, Nasdaq OMX, or IntercontinentalExchange following this announcement.

It's our opinion that neither merger agreement is without risks. The major antitrust concern with Deutsche Boerse involves its market share in European exchange traded derivatives. We still hold that market share concentration for derivatives exchanges is natural due to a developed liquidity pool that lowers transaction costs such as bid-ask spreads and slippage. Additionally, there are other methods in Europe to execute derivative transactions such as using over-the-counter products or trading on smaller derivative exchanges. That said, it's not certain that regulators would not block the merger on antitrust concerns. Additionally, regulators could require stipulations, such as business divestitures or breaking the vertical integration between derivative exchanges and their clearinghouse, that would make the merger unpalatable to NYSE Euronext and Deutsche Boerse.

There could be antitrust concerns from the listings, trading, and even data side of a Nasdaq-NYSE merger. Listings would be consolidated in the United States if a Nasdaq-NYSE merger were to go through, but it's quite common internationally for countries to have only one listing venue. A new competitor, BATS, is also planning to offer listing services in the US by the end of 2011. The combined NYSE/Nasdaq would have the leading market share in equities and options trading, but the US trading landscape is probably the most competitive in the world and would likely remain so even after the merger.

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Michael Wong, CPA  Michael Wong is a stock analyst at Morningstar.