Deutsche Boerse-NYSE Deal Turns Table on Shareholders: Real M&A

Duncan Niederauer’s wish for NYSE Euronext (NYX)’s takeover by Deutsche Boerse AG (DB1) to be a merger of equals may be coming true -- at the expense of shareholders in the Frankfurt-based exchange.

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE)’s unsolicited bid last week for NYSE Euronext valued the operator of the New York Stock Exchange at $42.50 a share, topping a February offer from Deutsche Boerse by almost 20 percent. Without committing any cash, the German exchange could be forced to surrender as much as 45 percent, up from about 40 percent, of the combined entity to NYSE Euronext’s owners to trump the Nasdaq OMX-ICE bid, according to data compiled by Bloomberg and Capstone Global Markets LLC.

While a bidding contest would help Niederauer, NYSE Euronext’s chief executive officer, recoup money for investors that lost more than 40 percent since the exchange went public in 2006, Deutsche Boerse’s all-stock offer has already cost the German exchange’s owners $1.4 billion since it was announced. Now, they face giving up even more equity if their managers counter Nasdaq OMX and ICE, which may push Deutsche Boerse to bid as much as $46 a share, the data show.

Photographer: Jin Lee/Bloomberg

Duncan Niederauer, chief executive officer of NYSE Euronext. Close

Duncan Niederauer, chief executive officer of NYSE Euronext.

Close
Open
Photographer: Jin Lee/Bloomberg

Duncan Niederauer, chief executive officer of NYSE Euronext.

“If Deutsche Boerse were to engage in a bidding war, their shareholders will likely come out with the short end of the stick,” said Michael Wong, a Chicago-based analyst at Morningstar Inc. “NYSE shareholders would be the ultimate beneficiaries of the bidding war, with the acquirers being saddled with the winner’s curse.”

‘The Right Thing’

NYSE Euronext is studying the Nasdaq OMX-ICE bid, according to a letter from Niederauer, 51, to employees contained in a filing with the Securities and Exchange Commission last week.

“NYSE Euronext has always been committed to our shareholders, and our board will consider the new proposal and do the right thing for our shareholders,” he wrote. “In the meantime, we remain fully committed to our previously announced deal with Deutsche Boerse.”

Deutsche Boerse’s board isn’t currently considering raising its bid, according to a person with direct knowledge of the matter who spoke on condition of anonymity because the deliberations are private.

Frank Herkenhoff, a spokesman for Deutsche Boerse, didn’t didn’t respond to two telephone messages. The company’s offer for NYSE Euronext is “the best possible combination for both shareholder groups and the stakeholders of the companies,” Deutsche Boerse said in a statement last week.

Nasdaq OMX Shares

Last week’s offer from Nasdaq OMX’s Robert Greifeld, 53, and ICE CEO Jeff Sprecher, 56, lifted New York-based NYSE Euronext 13 percent to $39.60 on April 1. Nasdaq OMX rose 9.3 percent to $28.23 for the biggest gain since March 2009, while Deutsche Boerse fell 1.4 percent to 52.81 euros ($75.19).

The German exchange, led by 55-year-old Reto Francioni, declined 14 percent from Feb. 14, the day before it and NYSE Euronext announced their deal, through last week. The slump lowered the value of its all-stock offer to $35.44, or 11 percent less than NYSE Euronext’s closing price last week.

Shares of Deutsche Boerse slipped 1.4 percent to 52.05 euros today. NYSE Euronext fell 1.6 percent to $38.98 in New York, while Nasdaq OMX retreated 2.8 percent to $27.44. ICE slipped 0.7 percent to $118.90.

Deutsche Boerse offered 0.47 of its own stock for each NYSE Euronext share in a deal currently valued at $9.3 billion to create the world’s largest exchange operator with venues in the U.S. and Europe.

‘How Many More’

At the time the deal was announced, Niederauer said on a conference call it was a “merger” with Deutsche Boerse, rather than an acquisition by the German exchange.

“I don’t know how many more times we can say that,” Niederauer said.

Last week, New York-based Nasdaq OMX and ICE of Atlanta made a cash-and-stock offer that valued the 219-year-old exchange operator at about $11.3 billion, Bloomberg data show.

NYSE Euronext owners will get 0.4069 Nasdaq OMX share, 0.1436 ICE share and $14.24 a share in cash, valuing the transaction at $42.50 on March 31. The offer is now worth about $42.92 a share, the data show.

ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets. The deal would give Nasdaq OMX a monopoly on listing companies in the U.S., the world’s largest capital market.

Nasdaq OMX, the second-largest U.S. bourse operator, and ICE said they will eliminate about $740 million in expenses in three years. That’s 74 percent more than Deutsche Boerse predicted in its agreement.

‘One and Only’

“Deutsche Boerse has been very clear about this being the one and only deal for them,” said Ian McDonald, a Baltimore- based exchange analyst at T. Rowe Price Group Inc., which oversees $482 billion and is NYSE Euronext’s biggest shareholder. “To get it done, they have to raise their synergies and their price.”

Deutsche Boerse’s current offer gives its owners about 60 percent of the combined company, the data show.

While Deutsche Boerse could raise its bid to $54.13 and still retain a 51 percent stake, data compiled by Bloomberg show, issuing the additional shares would devalue its own stock as currency, according to Capstone Global’s Sachin Shah.

Without offering cash, retaining at least a 55 percent stake would keep Deutsche Boerse from increasing its bid above $45.86, based on last week’s closing price, the data show.

‘Significant Control’

“The higher the stake they give up, the more control they’re giving up,” said Shah, a special situations and merger arbitrage strategist at Capstone Global in New York. “It becomes a little problematic not only in the context of shareholder value for their shareholders, but also the Germans are probably kind of wanting them to have significant control.”

“At the end of the day they don’t want a U.S.-based company to be running a German exchange,” Shah said. Still, “the only game they can play is upping the offer,” he said.

Speculation of a bidding war for NYSE Euronext made it one of the stock market’s biggest winners in 2011. The shares posted the 13th-biggest gain in the Standard & Poor’s 500 Index, rising 32 percent through last week. The exchange was up 155 percent since the market bottomed on March 9, 2009, compared with a 97 percent rise in the S&P 500, data compiled by Bloomberg show.

NYSE Euronext shares have still trailed the S&P 500 by more than 45 percentage points since its first trading session as a public company in March 2006. The company has fallen 64 percent from a record peak of $108.96 in November 2006. Losses in market share and pricing spurred by competition in equities trading weighed on the price, according to Morningstar’s Wong.

Copper Mines

Elsewhere in mergers and acquisitions, Minmetals Resources Ltd. (1208), the Hong Kong unit of China’s biggest metals trader, made an unsolicited offer of about C$6.3 billion ($6.5 billion) in cash for Perth-based Equinox Minerals Ltd. (EQN) to gain control of Africa’s largest copper mine.

Vivendi SA (VIV) of Paris agreed to buy Newbury, England-based Vodafone Group Plc (VOD)’s 44 percent stake in French mobile-phone operator SFR for 7.95 billion euros yesterday to win full control of its largest unit and secure more stable earnings.

There have been 6,173 deals announced globally this year, totaling $631.1 billion, a 25 percent increase from the $506.5 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Inyoung Hwang in New York at Ihwang7@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.