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NYSE Owners Become Biggest Losers on Niederauer’s German Embrace: Real M&A

Duncan Niederauer’s embrace of Deutsche Boerse AG (DB1) is transforming NYSE Euronext’s “merger of equals” into the worst takeover in America.

Since the owner of the New York Stock Exchange agreed in February to sell itself in return for equity in Deutsche Boerse, the value of the $9.53 billion agreement has plummeted by 23 percent, according to data compiled by Bloomberg. The decline is the largest of any all-stock takeover worth $1 billion or more. The offer is now below NYSE Euronext’s share price before the two venues said they were in talks to merge.

While Niederauer will head the world’s largest exchange after selling the symbol of American capitalism to a company based in Frankfurt, tying the deal to the value of Deutsche Boerse’s stock has cost NYSE Euronext (NYX) owners $2 billion on their 40 percent stake of the combined entity. With the European debt crisis ensnaring Germany and pummeling equities in the region’s largest economy, Niederauer faces the prospect of ending two centuries of American ownership for shareholders that have lost half their money since NYSE Euronext went public in 2006.

“It’s a take-under now as opposed to a takeover,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a telephone interview. “It’s a merger of equals in name only. Niederauer tried for a political deal. That had to impact the price and the structure of the deal.”

Richard Adamonis, a spokesman at NYSE Euronext of New York, and Naomi Kim, a spokeswoman for Deutsche Boerse, both declined to comment on the decrease in the value of the acquisition.

Caveat Emptor

The agreement was part of a wave of more than $30 billion in announced takeovers as the world’s biggest exchanges turned to dealmaking to cut costs and generate more revenue from trading in stocks, options and futures.

Combining NYSE Euronext and Deutsche Boerse will create the world’s largest futures exchange. It will also control 41 percent of U.S. options, helping to offset declines in equities trading. The deal, approved by both companies’ shareholders and boards of directors, trumped a hostile offer from New York-based Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) of Atlanta after regulators signaled they would block it.

NYSE Euronext’s owners will get 0.47 shares in the merged entity for each share they own. Shareholders of Deutsche Boerse, which traces its roots back to the Frankfurt Stock Exchange and the medieval fairs of the 11th century, will swap their shares and own 60 percent after the transaction is completed.

Stock Versus Cash

At the time it was announced, Niederauer, NYSE Euronext’s 52-year-old chief executive officer, called the all-stock deal a merger, rather than an acquisition by the German exchange.

“It’s a merger of equals,” he said Feb. 15. “I don’t know how many more times we can say that.”

That’s one reason why NYSE Euronext, whose history dates back to 1792 when the New York Stock Exchange was formed under a sycamore tree on Wall Street, agreed to take shares instead of cash, according to Edward Ditmire, an analyst with Macquarie Group Ltd. in New York.

“He could not have constructed the deal as a merger of equals if they were receiving cash as consideration,” he said in a telephone interview.

With Deutsche Boerse tumbling 29 percent since the announcement, the deal for NYSE Euronext is now worth only $7.38 billion, data compiled by Bloomberg show. On a per-share basis, that values NYSE Euronext at about $28.27, or 15 percent below its price before Feb. 9, when the two exchanges said they were in advanced talks to combine.

Last Resort

Deutsche Boerse’s decline deepened as concern that Germany will have to bail out other European governments to keep them from defaulting pushed the nation’s 30-company DAX Index (DAX) down 26 percent since reaching its 2011 high on May 2.

The benchmark gauge for German common equity extended its retreat last week as European Central Bank President Jean-Claude Trichet said threats to the euro region’s economy intensified and German officials said Chancellor Angela Merkel’s government was preparing plans to protect banks in case Greece defaults.

Germany is the chief underwriter of emergency loans offered to Greece, Ireland and Portugal.

Including today’s 1.5 percent slide, NYSE Euronext itself has tumbled 17 percent since Feb. 9 as its shares were dragged down by Deutsche Boerse. While NYSE Euronext has also been hurt by concern that France and Germany will tax financial transactions, its slump has been more than seven times as large as Nasdaq OMX’s 2.2 percent loss over the same span.

‘Ill-Timed’

“NYSE shareholders have definitely been punished by this deal” in the short-term, said Andrew Ross, a partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities and derivatives, said in a telephone interview.

Niederauer may be “responsible for not having greater vision or clarity as to what would take place. It looks like a very ill-timed deal. Nasdaq looks smart in staying out of this consolidation,” he said.

For Haverford Investments’ Tim Hoyle, the cost savings and earnings boost from combining with Deutsche Boerse will more than make up for the decrease in NYSE Euronext’s stock value.

NYSE Euronext and Deutsche Boerse are forecasting 400 million euros ($552 million) in cost savings. The biggest chunk of cost cuts will come from the new company’s technology business. The combined company will also boost revenue by about 150 million euros as a result of the merger, according to an earnings presentation from NYSE Euronext on Aug. 2.

Enduring Value

“The value of the combined is much greater than either company on its own,” Hoyle, research director for Radnor, Pennsylvania-based Haverford Investments, which oversees $6.5 billion, including NYSE Euronext shares, said in a telephone interview. “The long-term benefits still outweigh the short- term volatility. It may be frustrating that the stock is down now, but that’s what we endure as equity investors.”

That may not be enough for Niederauer to make long-time NYSE Euronext shareholders whole. Even with dividends, the exchange has lost 52 percent since it became a publicly traded company, data compiled by Bloomberg show.

“Things haven’t gone the way that Duncan, the management team and the board of NYSE had imagined,” Macquarie’s Ditmire said. “When this deal was announced, it looked like it was thoughtfully constructed.”

Now, “the stock is probably lower than it would have been if the deal hadn’t been struck. It’s been a rough ride for shareholders,” he said.

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Tara Lachapelle in New York at tlachapelle@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 +1-212-617-5919 or nbaker7@bloomberg.net.

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