The Nasdaq Stock Market (NDAQ) and Borse Dubai ended their protracted fight over Sweden's OMX Group (OMX.ST) on Sept. 20 by agreeing to join forces not just on an OMX bid but also in a far-reaching deal that could have broad implications for the fast-growing and rapidly consolidating universe of financial exchanges.
In a complex minuet, Borse Dubai will continue advancing its $4 billion cash bid for OMX Group. But Nasdaq then will acquire those OMX shares in a cash-and-shares arrangement that will leave Borse Dubai with nearly 20% of Nasdaq, though its voting rights will be restricted to 5%. Shares in Nasdaq rose 5.8% by mid-morning in New York trading.
Nasdaq also will become the principal commercial partner and a strategic shareholder in the fledgling Dubai International Financial Exchange (DIFX), which will be rebranded Nasdaq and use trading technology from Nasdaq and OMX. Finally, Borse Dubai will acquire Nasdaq's 28% stake in the London Stock Exchange (LSE.L) for around $1.6 billion.
Yet even as Nasdaq and Borse Dubai appeared to have stitched up OMX, the announcement could be triggering a bidding war with rival Gulf state Qatar, which has acquired a 20% stake in the LSE. Qatar—which confirmed that it also has acquired 9.98% of OMX—issued a statement asking OMX shareholders to "take no action" on the new bid from Nasdaq and Dubai. OMX shares surged 8.1% after the news.
This deal is a snapshot of how fast the world is changing. Here you have Nasdaq Chief Executive Bob Greifeld, the U.S. exchange maven, striking a partnership with Sheikh Mohammed bin Rashid Al Maktoum, the shrewdest and most far-sighted ruler in the Gulf and one who makes a point of getting on well with all of his neighbors, including Iran.
Western financiers are making pilgrimages eastward. The money piling up in the Gulf has to go somewhere, and a lot of it is going to wind up in stakes in companies outside of the region, including the U.S. On the very same day as the Nasdaq/Dubai deal, Qatari investment fund Delta Two moved a step closer in its long-brewing $21 billion takeover of British supermarket chain J Sainsbury (SBRY.L). And Carlyle Group, the big U.S. buyout firm, announced it was selling a 7.5% stake to Mubadala Development, a wing of the Abu Dhabi government. Mubadala, according to Carlyle, got a 10% "liquidity discount," presumably by paying cash.
Assuming all goes as planned, Nasdaq and Borse Dubai are creating what could become a formidable player. Nasdaq's Greifeld said Sept. 20 that the two OMX suitors (BusinessWeek, 8/23/07) were brought together by a mutual acquaintance. When they met, Greifeld said, the two exchanges figured out that their interests were "parallel; they did not intersect."
Nasdaq, says Greifeld, was interested in using OMX as a vehicle for expanding into the Nordic regions, which OMX has largely sewn up with its Nordic Exchange, and further into Europe. Dubai, meanwhile, wanted to use OMX technology to take a leadership role in emerging markets. The two decided to work together rather than fight.
For Nasdaq, the tieup with Dubai gives the U.S. exchange an entrée into one of the world's fastest-growing regions—one that has amassed trillions (BusinessWeek, 3/13/06) in petrodollar wealth over the last few years.
Although Nasdaq may not have been Borse Dubai's first choice as a partner, linking up with the U.S. exchange likely will bolster Dubai's so-far-successful effort to be the financial center of the Gulf region and beyond. The city-state has done very well at persuading investment banks to set up in the Dubai International Center, a real estate project in the new part of town, but the DIFX, which was set up two years ago as a stock market with Western-style regulation, has struggled to attract listings.
Complicating matters, other governments in the region such as Qatar and Saudi Arabia have similar ambitions in finance. Having the Nasdaq brand on the Dubai exchange may make it easier for other Middle Eastern governments to accept Dubai as a kind of New York or London of the Gulf. "Our primary objective is to build a world-class, growth-oriented exchange out of Dubai and to become the center of capital-markets activities in the emerging markets," Borse Dubai Chairman Essa Kazim said in a statement. In a recent shakeup, Dubai's ruler combined the DIFX and the more successful domestic stock market, the Dubai Financial Market, under the Borse Dubai umbrella with the intent of giving the whole enterprise more oomph.
Of course, many questions remain. There may be an outcry in the U.S. about whether an entity owned by the ruler of Dubai is acceptable as a major shareholder in a key U.S. financial exchange. The bitter and pointless battle over Dubai Ports World's (now known as DP World) attempted acquisition of various U.S. ports, including those in New York, still lingers in memories in both the U.S. and the Gulf. Borse Dubai will have to pass review by the U.S. government.
Greifeld is optimistic, noting "this is not a transaction where we are selling operational control." Dubai's voting rights will be restricted to 5%. But, he acknowledged, "It is up to us to explain to all stakeholders how good this is for New York and the U.S."
The LSE Question
Another issue is what Borse Dubai will do with its new 28% ownership stake in the London Stock Exchange. Some observers think the Dubai crowd would rather have struck a partnership with the LSE or the New York Stock Exchange (NYX) than with Nasdaq. It is to Greifeld's credit that he has overcome those objections.
Dubai's LSE stake leaves its options open—and also somewhat frustrates rival Qatar, which was interested in acquiring Nasdaq's piece of the LSE. As a kind of consolation prize, Qatar on its own acquired 20% of the LSE on Sept. 20 at a substantially higher price than Dubai paid, helping drive up the value of LSE shares by 16.1%. That annoyed some Nasdaq shareholders, who questioned whether the New York exchange had obtained the best possible price for its stake in the handshake deal with Dubai.
In a statement, LSE Chief Executive Clara Furse welcomed the Qatar investment, saying the Qatar Investment Authority, which is the buyer, "has an impressive track record of making substantial long-term investments…so we are delighted to see that it recognizes the Exchange's unique strategic position and excellent prospects." In other words, the LSE at least publicly sees Qatar as protection from a takeover. But as the continued wrangling makes abundantly clear, the exchange wars are far from over.