NYSE Shareholders Anticipate Counterbid From Deutsche Boerse After Nasdaq
Deutsche Boerse AG will probably raise its offer for NYSE Euronext to fend off Nasdaq OMX Group Inc. (NDAQ)’s unsolicited bid, according to three shareholders of the biggest U.S. stock exchange operator.
NYSE Euronext Chief Executive Officer Duncan Niederauer told employees on April 1 that while he will study the $11.3 billion proposal from Nasdaq OMX and IntercontinentalExchange Inc. (ICE), the company is “fully committed” to the Deutsche Boerse deal. Deutsche Boerse’s board isn’t currently considering raising its announced $9.53 billion bid, according to a person with direct knowledge of the matter who spoke on condition of anonymity because the deliberations are private.
The offer from Nasdaq OMX and ICE may force Deutsche Boerse to act because of the higher value and its cash component, said Ian McDonald, a Baltimore-based U.S. exchanges analyst at T. Rowe Price Group Inc., NYSE Euronext (NYX)’s biggest owner with a 7.3 percent stake on Dec. 31, data compiled by Bloomberg show. Regulators may block either plan because they concentrate ownership of securities venues in the U.S. and Europe.
“It’s difficult to view the two deals on equal footing with their prices roughly 20 percent apart,” McDonald said. “I view the Nasdaq-ICE bid as credible, and I don’t believe it faces any more regulatory uncertainty than the Deutsche Boerse- NYSE combination.”
Deutsche Boerse’s all-stock deal, valued at $34.89 a share at 4:33 p.m. in New York, is 18 percent below Nasdaq OMX and ICE’s bid of $42.48 a share, which includes $14.24 in cash. New York-based Nasdaq OMX is seeking a lock on U.S. stock listings and almost half of American equity and options trading. ICE would get the London-based Liffe futures markets. NYSE Euronext faces a 250 million euro ($356 million) breakup fee should the merger with Deutsche Boerse fail, company filings show.
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 last week. Its board hasn’t discussed changes to its offer and it considers Nasdaq OMX and ICE’s announcement on April 1 to be a proposal rather than a formal bid, said the person familiar with the matter who declined to be named.
Ray Pellecchia, a spokesman for NYSE Euronext, declined to comment. Frank Herkenhoff, a spokesman for Deutsche Boerse, didn’t respond to two telephone messages today.
Nasdaq OMX and ICE’s bid has pushed NYSE Euronext up 11 percent since it was announced to $38.98, making the New York- based company one of 2011’s biggest winners among large U.S. stock. Nasdaq OMX has risen 6.2 percent to $27.44 in the past two days. Atlanta-based ICE slumped 3.8 percent to $118.90, and Deutsche Boerse slipped 3 percent to 52.20 euros.
“History suggests that when a third party steps in with an offer, then all parties must step back and reassess,” said Keith Wirtz, who helps oversee $18 billion, including about 100,000 NYSE Euronext shares, as chief investment officer for Fifth Third Asset Management in Cincinnati. “Deutsche Boerse may be forced to raise their offer if they want the transaction to be consummated. We haven’t seen the final word yet.”
NYSE Euronext, which has trailed the Standard & Poor’s 500 Index by more than 46 percentage points since its first day of trading as a public company in March 2006, is the 24th-best- performing stock in the gauge this year. The owner of the New York Stock Exchange has climbed 17 percent since Feb. 8, the day before the company said it was in merger talks with Deutsche Boerse. Deutsche Boerse has slid 9.2 percent in that period.
Nasdaq OMX’s shares have more than quadrupled since Greifeld started as CEO. They beat the Bloomberg World Exchanges Index in 2010, rising 20 percent versus the measure’s 5.3 percent advance. While the stock is up 16 percent in 2011, its increase since the market bottomed in March 2009 is 39 percent, less than the exchange index’s 120 percent advance.
NYSE Euronext has fallen 42 percent since March 7, 2006, its first trading session as a public company, and lost 55 percent since Nov. 14, 2007, when Niederauer’s appointment was reported. It gained 19 percent in 2010 and 30 percent in 2011.
Nasdaq OMX, the second-largest U.S. bourse operator, and ICE said they will generate about $740 million in expense cuts and synergies after three years. That compares with Deutsche Boerse’s 300 million euros in cost savings.
“We have some skin in this game and we would like to see the very, very best deal for NYSE Euronext,” said Thomas Caldwell, chairman and chief executive officer of Caldwell Securities Ltd., a C$1 billion ($1 billion) money management firm in Toronto that owns shares of NYSE Euronext, Nasdaq OMX and Deutsche Boerse AG. (DB1) “We think Greifeld’s bid is a good bid, and still the Deutsche Boerse deal does have a certain amount of attractiveness. They could sweeten it and come close to Nasdaq’s offer. It would seem odd to me that they would just roll over.”
Greifeld, 53, joined Nasdaq OMX in May 2003 and began acquiring companies in 2005, when he bought the Inet electronic market. That year, he cut a third of the company’s staff, vacated surplus office space and turned to lower-cost computer systems to handle trading.
Nasdaq OMX expenses fell to 59 percent of revenue last year from 68 percent in 2006, while it bought more than a dozen companies, Bloomberg data show. Deutsche Boerse may say Nasdaq OMX’s cost-cutting targets aren’t as achievable as its own, said Ed Ditmire, an analyst at Macquarie Group Ltd. in New York.
“The management teams of NYSE and Deutsche Boerse will work to convince the market that their deal is a better deal, that it makes more sense and delivers more value in the longer term,” he said. Still, Nasdaq OMX and ICE have “good track records” that will make too much criticism “a tough sell to the market,” Ditmire said.
While a combination of Deutsche Boerse and NYSE Euronext “makes a lot of sense” because of synergies, too high of a premium would defeat its purpose, said Juergen Meyer, a fund manager at SEB Asset Management in Frankfurt, which oversees about $220 billion. One of his funds owns 800,000 Deutsche Boerse shares.
“If one party gains more than the other one, it doesn’t make sense anymore,” Meyer said. “Deutsche Boerse as a stand- alone company is a highly profitable business. There is absolutely no need to buy something at any price.”
ICE CEO Jeff Sprecher’s unsolicited bid for the Chicago Board of Trade in 2007 forced the Chicago Mercantile Exchange to raise its stock offer three times, eventually boosting it by 25 percent, from the original bid in October 2006 to July 2007 when shareholders approved the deal that created CME Group Inc. (CME)
The CME originally offered 0.3006 share for each CBOT share, and ended paying 0.375 share. The value increased by about $3.2 billion to $11.2 billion from the original deal.
NYSE Euronext and Nasdaq OMX would have about 48 percent of U.S. equity trading. They have struggled to keep market share since Kansas City, Missouri-based Bats Global Markets and Jersey City, New Jersey-based Direct Edge Holdings LLC started venues about five years ago. NYSE Euronext currently handles 28 percent of equity volume and Nasdaq OMX has 20 percent, according to data from London-based Barclays Plc for the fourth quarter.
A Deutsche Boerse acquisition would create the world’s largest exchange operator and futures venues that would rival the world’s largest, according to data from the Futures Industry Association, a trade group representing Wall Street banks. It would control 11 derivatives markets that handled a total of 4.8 billion contracts in 2010, according to FIA. That compares to 3.1 billion trades last year at Chicago-based CME Group, the world’s largest futures exchange.
“Both parties can make a case their bid means better corporate outcomes or has a better chance on the regulatory front,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “And since those things are both arguable, the only thing then that becomes important is the price. That’s the only real, tangible thing.”
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