NYSE Unveils Proposed Tie-Up With
as Rival Scrambles
ALISTAIR MACDONALD, AARON LUCCHETTI
& DENNIS K. BERMAN
Wall Street Journal 22may2006
The battle to consolidate the world's stock exchanges intensified, as the New York Stock Exchange made a €8 billion ($10.2 billion) proposal to link up with Euronext NV, one of Europe's biggest stock-market operators, even as Germany's main market operator scrambled to prevent such a deal.
People familiar with the situation said Euronext has indicated that it favors NYSE as a merger partner over German suitor Deutsche Börse AG.
The proposed deal would transform the 214-year-old NYSE from the last of the traditional floor-based stock exchanges into a trans-Atlantic powerhouse, with a major trading presence in futures and options as well as stocks.
But the battle for Euronext, which has dragged on for months, is far from over. Deutsche Börse, which operates the Frankfurt Stock Exchange, yesterday fleshed out details of a potential offer, hoping that it could still win a deal with its European rival, a person familiar with the matter said. Euronext shareholders, who have watched their shares triple in value over the past year, are likely to play the two bidders off against each another.
Deutsche Börse is expected to tell investors that it can squeeze synergies of about €240 million ($306.6 million) from a combination with Euronext, a person familiar with the matter said. This is below the €293 million synergies promised by NYSE Group. Analysts have, in the past, questioned what synergies Deutsche Börse can make in a deal with Euronext. There is less overlap in the businesses than with NYSE and any deal would need to take into account concessions demanded by competition authorities. Analysts also believe that Deutsche Börse will come against political opposition if it tries to cut jobs. Deutsche Börse declined to comment.
Euronext operates the Paris, Amsterdam, Brussels and Lisbon stock markets, as well as the London-based Euronext.liffe, which trades futures and options. It dismissed Deutsche Börse's most recent proposal, made last week, saying it offered nothing new. Euronext executives are expected to back an alliance with NYSE Group Inc., the NYSE's owner, according to a person familiar with the matter. Euronext's board meets today to consider both proposals.
The Euronext proposal represents a big bet for NYSE Group Chief Executive John Thain, who took the Big Board public in March and now wants to beef up its presence in the fast-growing market for derivatives — financial contracts such as futures and options whose values are derived from the performance of the underlying asset.
Mr. Thain's Euronext hopes take on added importance because NYSE competitor Nasdaq Stock Market Inc. has been charting its own international expansion, angling to buy the London Stock Exchange. (See related article.)
The NYSE proposal, finalized over the weekend, calls for combining with Euronext through a stock swap, forming a company with a market value of about $21 billion.
Under the NYSE proposal, each NYSE share would be converted into one share of common stock of the combined company, which would be named NYSE Euronext.
Holders of Euronext ordinary shares would be offered the right to exchange each of their shares for 0.980 shares of NYSE Euronext stock and €21.32 in cash. Based on the NYSE's closing Friday at $64.50, that values each Euronext share at €70.80 — below the Friday close of €74.60. The transaction is based on a fixed ratio of 1.4000 shares of the combined company for each Euronext ordinary share, with 30% of the aggregate consideration paid in cash.
That represents a 5% discount to Euronext's share price Friday in Paris, but roughly a 6% premium to the price Wednesday, when the company put out a news release acknowledging it was in discussions about a "transformational combination." Investors and arbitragers bid up the shares in expectation of a deal.
Deutsche Börse's earlier proposal is based on a three-month moving average of Euronext's share price, a person briefed on the offer said yesterday. That equates to a per-share price in the €66-to-€67 range.
Deutsche Boerse issued a statement Monday denying a report that it would consider an all-share offer valuing Euronext at about €90 a share, but said it remains in contact with Euronext.
Shares in Deutsche Boerse fell 5.3% to €104.85 on the Frankfurt exchange. Euronext dropped 1.9% to €73.15.
The structure of the combined NYSE-Euronext would leave the U.S. exchange in charge, but with concessions to European holders and regulators who want to keep the Continent at the heart of global finance. NYSE would hold 11 of 20 board seats, and its chief executive, Mr. Thain, would stay in the top position. Euronext Chief Executive Jean-François Theodore would be the deputy chief executive officer, with responsibilites for European operations, and European operations would remain in Paris, Euronext's home. Euronext Chairman Jan-Michiel Hessels would become the combined company's chairman, people familiar with the situation said. Deutsche Börse's proposal called for each company to get eight board seats, with the deciding vote to be cast by Deutsche Börse's chairman, the person briefed on the offer said.
Citigroup acted as financial adviser for NYSE Group.
Many factors, however, could scuttle an NYSE deal.
Regulators in the U.S. and Europe would need to approve the transaction. And Euronext shareholders, whose approval also would be required, are set to vote Tuesday on a motion that combining with Deutsche Börse is the best option for the company. A group of activist U.S. and U.K. hedge funds are pressuring Euronext to merge with Deutsche Börse, in which the same hedge funds also own shares.
In essence, Euronext's holders must weigh competing visions of the next-generation stock market: one that becomes the clear European champion; another that bridges the European and American markets.
As the NYSE maneuvers to close a deal with Euronext, Nasdaq is continuing its pursuit of London Stock Exchange PLC. Nasdaq has recently built a 25% stake in LSE; it approached the exchange earlier this year but was rebuffed. A successful NYSE-Euronext deal would step up pressure on Nasdaq to get its own done. And the LSE might be more favorably inclined in the wake of such a combination.
Several forces are driving the move toward global consolidation. Trading costs are rapidly shrinking, putting pressure on the exchange operators to grow and expand into new markets to maintain revenue and profits. Moreover, companies have grown less eager to list their shares in the U.S. because of a tougher regulatory climate there and the ease of raising capital elsewhere. Five years ago, most big companies seeking public financing felt compelled to list their shares in New York. Today, non-U.S. companies are finding markets like London and Hong Kong equal to the capital-raising task.
If both Nasdaq and the NYSE succeed in their deals, it would create two competing financial-market giants with modestly different strategies. A Nasdaq-LSE group would have a heavy focus on the trading of stocks in the two biggest financial centers in the world, New York and London.
The NYSE-Euronext group would have a solid position in stocks, but it would also have a significant beachhead in futures and options. Trading of those is growing more rapidly than stock trading, and much of the activity takes place in the so-called over-the-counter market, rather than at exchanges. The Chicago Mercantile Exchange, a dominant player in futures trading, has a market value of $15 billion, making it about a third larger than the NYSE.
Last year, a third of Euronext's revenue came from its London-based Liffe derivatives arm, which trades futures and option contracts on equities, indexes, interest rates and commodities. Euronext acquired the operation, then known as the London International Financial Futures and Options Exchange, in 2002, outbidding the LSE.
At the time Euronext was accused of overpaying, but the trading of derivatives has since exploded, and it was derivatives that made Euronext so attractive to the NYSE's Mr. Thain.
Euronext's Liffe deal also left the LSE with only one string in its bow — equities — and the company has been stalked ever since by Deutsche Börse and Euronext.
Euronext management has told some fund managers that it favors the NYSE over Deutsche Börse as a merger partner because a Big Board deal would likely leave Euronext with greater autonomy in Europe and provide greater synergies, according to people familiar with the matter. Management is expected to express this preference at the annual meeting Tuesday.
Yesterday, a Deutsche Börse spokesman said, "We continue to believe that our proposal presents the most attractive consolidation option for customers, shareholders, employees and for the financial centers involved."
But when Deutsche Börse's Chief Executive Reto Francioni and supervisory board Chairman Kurt Viermetz sat down with Euronext's Messrs. Theodore and Hessels last Wednesday, it was clear that things hadn't progressed significantly since Deutsche Börse presented its vision of a deal in February, people familiar with the matter said.
Deutsche Börse wanted to structure the deal in such a way as to reflect the differing market values of the firms, a person familiar the matter said. Deutsche Börse, with a market value of €11.29 billion ($14.42 billion), expected to play a more senior role than the smaller Euronext in any combination.
—Edward Taylor and Jason Singer contributed to this article.
Other Exchange Courtships Loom
As NYSE and Euronext Near Deal, Search for
New Revenue Adds To Consolidation Fever Globally
AARON LUCCHETTI / Wall Street Journal 22may2006
The global consolidation among exchanges is heating up, with the New York Stock Exchange expected to unveil a detailed offer for Euronext NV as early as today.
The real intrigue could come after a Euronext deal, as exchanges throughout the world respond, perhaps by seeking out their own merger partners in the increasingly "bigger is better" business of securities trading.
A combination of NYSE Group Inc. and Paris-based Euronext, which has a strong futures and options business along with traditional stock trading, could set off a wave of trans-Atlantic deals. Once thought to be impractical, such deals will change the way people buy and sell stocks and other financial instruments, cutting costs and opening new investment strategies. They could make it easier for companies to list their stocks on several continents through a single exchange. Exchanges, for their part, are typically for-profit companies, and they need to expand to improve revenue as trading costs come down.
Nasdaq, the NYSE's U.S. rival, is attempting to gobble up London Stock Exchange PLC. The 35-year-old market has purchased 25% of the centuries-old LSE's available shares, and Nasdaq's aggressive chief executive, Bob Greifeld, has made it clear he would like to combine his company with the London exchange operator.
Should the NYSE, led by Chief Executive John Thain, and Nasdaq both complete landmark transactions with European partners, it would leave Deutsche Börse, Europe's biggest exchange by market value, looking to do deals with smaller exchanges in Italy, Spain or Switzerland.
Any such deal would be bittersweet for Deutsche Börse Chief Executive Reto Francioni, who remains interested first in Euronext and also in the U.S. The Frankfurt market operator earlier tried unsuccessfully to take on a larger U.S. futures exchange in its flagship bond contract, and may still decide to partner with such an exchange. Yet U.S. regulators haven't yet shown much willingness to let a foreign exchange buy a U.S. market. Futures, popular instruments with professional investors, are contracts that allow their holders to buy or sell an underlying asset as a set price in the future.
If an NYSE-Euronext deal doesn't pan out and Euronext opts to hitch its fortunes to Deutsche Börse, the Big Board operator might be forced to give up on a big European deal, setting up a U.S.-Europe rivalry akin to Boeing versus Airbus in the airline business.
That is assuming NYSE wouldn't try to steal away the LSE from Nasdaq, whose 25% stake in the LSE will at least give it a say in the London exchange's future. It is unlikely Nasdaq would vote its shares in favor of an NYSE-LSE deal. Also, the primarily stocks-driven LSE wouldn't give Mr. Thain the derivatives business he has been looking for.
Thus, Mr. Thain would be likely to look elsewhere in the U.S. CBOT Holdings Inc., operator of the Chicago Board of Trade, could be a digestible fit for the NYSE and give it entree into lucrative U.S. futures business. Or Mr. Thain could make a push to buy options exchanges, which might complement the Big Board's fledgling stock options business.
The global exchange-consolidation game has smaller players, too: Exchanges from Milan to Philadelphia are trying to decide whether to stay independent by selling shares of themselves to the public or to sell out to a larger exchange conglomerate.
Several factors are driving the global merger activity. As competition drives trading prices toward zero, exchanges need to grow ever larger to compete.
At the same time, rapidly improving technology has increased trading capacity and made it easier for one exchange to handle all kinds of trades, such as Latin American stocks and German interest-rates futures.
Hedge funds and other increasingly sophisticated investors are demanding trading platforms that are cheap and fast and can easily access securities throughout the world.
"People want trade globally, so it makes sense that exchanges across the world are looking at merging," says Rick Wetmore, an analyst at Turner Investment Partners, a Berwyn, Pennsylvania, firm that owns shares of European and U.S. exchanges.
The current technology of brokerage firms makes it easier for investors to access many exchanges at once, but greater efficiencies can be gained from having one-stop shopping at a single large exchange, especially when investors are buying financial instruments with borrowed money, which requires putting up collateral on each exchange where they are dealing.
Also, as exchanges have morphed from membership associations of brokerage firms into for-profit companies, they have developed technology to remove barriers to trading. Executives at the NYSE, for instance, often said they were in the business of discovering the best price for investors. Now, some exchange officials describe the company as a factory where trades are manufactured. The more trades investors make, the bigger the fees and the higher the profit. Bottom line, they say: Bigger exchanges are stronger, better businesses.
The caveat to the bigger-is-better model is competition: Regulators and investor advocates are watching that barriers of entry for new competitors must be low enough so that bigger exchanges with increasing market power aren't able to raise their per-trade transaction fees to the detriment of investors.
Two to Tango:
Exchanges Learn to Dance
After going public within the past five years, exchange companies in Europe and the US are looking to merge.
Note: Graphic lists only exchanges and exchange-service companies acquired. Sources: WSJ Market Data Group; the exchanges; Dealogic; Thomson Financial
Asia's Exchanges Watch Takeover Race
NISHA GOPALAN / Wall Street Journal 22may2006
HONG KONG — Despite numerous roadblocks, Asia's stock exchanges are preparing for the extension of the takeover race among exchanges in Europe and the U.S.
In Asia, exchanges are still considered national preserves: Without government approval, no single entity can own more than 5% of Hong Kong Exchanges & Clearing Ltd., 15% of Australian Stock Exchange Ltd. or 5% of Singapore Exchange Ltd.
Still, led by the Tokyo Stock Exchange Inc., Asia's disparate exchanges are increasingly competing with one another for the same business: China's lucrative listings, a scenario that analysts say may drive some alliances and tie-ups among exchanges.
"At some point in the future, it is inevitable that the smaller exchanges in Asia align themselves with larger entities," said Andrew Beal, director of Pacific equities at Henderson Global Investors. "The sharing of trading and settlement infrastructure makes tremendous financial sense. But it will be some time before we see full [mergers and acquisitions], as in Asia, national interest tends to win out over cold financial logic."
Unlike Europe, which has an increasingly pan-European investor base, Asia has significant differences in culture, political frameworks, legal structures, currencies and language. Still, Citigroup analyst Mike Younger noted there may be opportunity for significant synergies among exchanges.
"It may be limited to back-office or systems consolidation, but you can't rule out cross-border consolidation," he said.
Shares of many Asian exchanges have soared this year, partly on hopes that the hectic deal-making in vogue globally will feed through to the region. Bursa Malaysia Bhd. has jumped 82% since the start of the year; Osaka Securities Exchange Co., Japan's No. 2 market behind Tokyo's exchange, has climbed 75%; Hong Kong Exchanges & Clearing has risen 67%; and Singapore Exchange has gained 48%.
Many regional exchanges have been quick to deny talk of trans-Pacific bids. Singapore Exchange earlier this month denied an April 6 report in Singapore's Business Times that it was in merger talks with Nasdaq Stock Market Inc. But on April 21, Chief Executive Hsieh Fu Hua said Singapore Exchange could be the first mover if marketplaces consolidate in Asia, noting it was open to mergers as well as collaboration over clearing systems.
Asia's exchanges already have started consolidating within national borders. HKEx was formed from the merger of Hong Kong's stock and derivatives exchanges seven years ago. The Korea Exchange was formed from the merger of three exchanges in 2003.
In March, the Australian Stock Exchange unveiled a A$2.3 billion (US$1.7 billion) bid for the operator of the Sydney Futures Exchange, a deal ASX Managing Director Tony D'Aloisio said would leave the merged entity "better positioned ... if the merger of exchanges cross-border does occur."