Nasdaq OMX Group Inc. (NDAQ)’s Robert Greifeld is pinning his company’s future on two of the securities industry’s oldest businesses: trading stock and raising money.
His unsolicited bid for NYSE Euronext’s U.S. operations would give him almost half of the nation’s stock trading and a monopoly on listing corporations in the world’s largest capital market. While Deutsche Boerse AG (DB1) agreed to purchase NYSE Euronext in February to expand its dominance in futures, Greifeld’s proposal involves selling that business to IntercontinentalExchange Inc. (ICE)
Greifeld, 53, plans to boost profitability from equities after competition from Bats Global Markets and Direct Edge Holdings LLC eroded earnings since the mid-2000s. The chief executive officer of Nasdaq OMX, who has cut costs as a percentage of revenue to 59 percent from 68 percent in 2006, would eliminate at least one U.S. data center from a combined NYSE-Nasdaq OMX and shift trading onto one technology platform.
“Greifeld’s done a reasonably good job at cost-cutting and he needs to work on building the revenue side of the business,” said Jerome Dodson, the San Francisco-based president who oversees about $6 billion at Parnassus Investments, which holds Nasdaq OMX shares. “With the combination, there’d be an opportunity to reduce costs by even more. I’m supportive of the offer.”
Nasdaq OMX and ICE made an unsolicited bid of about $11.3 billion for NYSE Euronext (NYX) today, trying to snatch the owner of the New York Stock Exchange away from Frankfurt-based Deutsche Boerse. Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.42 a share.
As part of the deal, ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets. The Deutsche Boerse deal, valued at $9.53 billion when announced in February, creates the world’s largest exchange operator with venues in the U.S. and Europe.
“I wouldn’t look at this proposal from Nasdaq to be its final bid,” Dick Grasso, the former chairman and chief executive officer of the New York Stock Exchange who was forced to quit in 2003 after receiving $140 million in pay, said in a Bloomberg Television interview today. Greifeld is a “very capable CEO and isn’t going to put out his final offer because he knows Deutsche Boerse is going to outbid him.”
NYSE Euronext surged 13 percent to $39.60 at 4 p.m. in New York, reaching the highest price since October 2008. Nasdaq OMX rose 9.3 percent to $28.23 for the biggest gain since March 2009. Both are based in New York. ICE, based in Atlanta, slumped 3.1 percent to $119.75, and Deutsche Boerse of Frankfurt slipped 1.4 percent to 52.81 euros.
Deutsche Boerse has fallen 8.1 percent and NYSE Euronext climbed 19 percent since Feb. 8, the day before the two companies said they were negotiating about a merger. Nasdaq OMX rallied 9.3 percent, and ICE added 1.3 percent.
Deutsche Boerse’s bid for NYSE Euronext is “the best possible combination for both shareholder groups and the stakeholders of the companies,” Deutsche Boerse said in a statement.
‘The Right Thing’
“Our board will consider the new proposal and do the right thing for our shareholders and other stakeholders,” Niederauer wrote in an e-mail to employees today, according to a regulatory filing. “In the meantime, we remain fully committed to our previously announced deal with Deutsche Boerse,” and plan to hold a shareholder vote in July, he said.
“Greifeld is trying to make sure he’s one of the survivors in this Darwinian struggle in global markets,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “Exchanges are struggling for survival in a new world where consolidation is the key to get scope and size.”
Under the terms of the bid, Nasdaq OMX would buy NYSE Euronext’s equity and options trading and technology businesses, while ICE purchases its futures operations. Nasdaq OMX and ICE will continue to operate as separate businesses, according to today’s statement.
‘Strong National Exchange’
“A vast majority of developed countries have a strong national exchange, a cornerstone of their economies,” Greifeld said in an e-mailed statement. “To remain competitive and reduce market fragmentation, we will create a strong global exchange to increase market transparency and liquidity and attract worldwide issuers.”
Nasdaq OMX and ICE said they plan to raise $3.8 billion from loans to help fund the bid. Lenders led by Bank of America Corp. and Wells Fargo “are prepared to arrange fully committed financing” for the takeover, the companies said in today’s statement. Standard & Poor’s put Nasdaq OMX’s credit rating on review for a downgrade.
NYSE Euronext stockholders would receive $14.24 in cash plus have each of their shares swapped for 0.4069 share of Nasdaq OMX, equal to $10.51 based on the stock’s closing price yesterday, and 0.1436 share of ICE, valued at $17.74.
“The $42.50 sounds great on paper,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global in New York. “But on a practicality level, as Nasdaq and ICE shares trade today and the next few days, as we’ve seen over the past month or two now of how Deutsche Boerse shares have traded, that will determine if the implied value is $42.50 or much lower.”
Bank of America and Evercore Partners Inc. provided financial advice to Nasdaq OMX on the deal, while Shearman & Sterling LLP served as legal adviser, according to today’s statement. Lazard Ltd., Broadhaven Capital Partners LLC, Bank of Montreal and Sullivan & Cromwell LLP helped ICE.
More than $20 billion of exchange acquisitions have been announced in the past five months as venues in North America, Europe and Asia try to cut costs and offset declining profits from equity trading with options, futures and derivatives.
Singapore Exchange Ltd. (SGX)’s $8.3 billion bid for Sydney-based ASX Ltd. on Oct. 25 set off the spree of offers. London Stock Exchange Group Plc agreed to buy Canada’s TMX Group Inc. for about $3.1 billion on Feb. 9, and Deutsche Boerse followed less than a week later with its takeover of NYSE Euronext. The same month, Bats agreed to buy Chi-X Europe Ltd., Europe’s largest alternative trading system.
NYSE Euronext was formed when the operator of the New York Stock Exchange bought Europe’s second-largest exchange in 2007. It now owns exchanges in Amsterdam, Lisbon, Paris and Brussels, as well as London-based Liffe, Europe’s second-largest derivatives market. The company also runs three U.S. stock exchanges: NYSE Arca, NYSE Amex and the New York Stock Exchange, two options platforms and the NYSE Liffe U.S. futures exchange.
ICE would catapult itself to fourth place in terms of global futures trading volume. ICE specializes in energy and commodities trading, with its only offering in financial products coming from currencies and equity indexes at its New York-based ICE Futures U.S. exchange.
The deal would give ICE trading in Euribor three-month futures. NYSE Liffe U.K.’s Euribor contract was the fourth- largest interest-rate future in the world last year, according to the Futures Industry Association, a trade and lobbying group. Eurodollars traded at Chicago-based CME Group Inc. (CME), the world’s largest futures market, were the most-actively bought and sold interest-rate future in 2010, according to FIA.
“The value’s all driven by derivatives,” said Robert Webb, a finance professor at the University of Virginia and former trader at the Chicago Mercantile Exchange. “Their strategy is to remain a major player in this business at a time you’re seeing consolidation around the world.”
ICE gaining interest-rate and bond futures is “also a very important consideration” to its bid, Webb said.
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