NYSE Arbitragers See Higher Bid Amid Record Options: Real M&A

NYSE Euronext CEO Duncan Niederauer
Duncan Niederauer chief executive officer of NYSE Euronext. Photographer: Jin Lee/Bloomberg

Traders who profit from mergers and acquisitions are more convinced than ever that Deutsche Boerse AG’s $9.5 billion takeover of NYSE Euronext will get trumped by a competing offer.

The 219-year-old owner of the New York Stock Exchange traded as much as $1.23 higher than Deutsche Boerse’s offer price today, according to data compiled by Bloomberg. That’s the biggest “negative premium,” which occurs when merger arbitragers anticipate a higher bid, in the hours both were trading since the all-stock deal was announced on Feb. 15. At the same time, options dealers are charging a record premium for bullish contracts on NYSE Euronext, the data show.

While Chief Executive Officer Duncan Niederauer said Deutsche Boerse is his “preferred partner,” Nasdaq OMX Group Inc. has discussed a joint offer with IntercontinentalExchange Inc. to counter the Frankfurt-based exchange, a person with knowledge of the matter said. A bidding contest would intensify consolidation in an industry where London Stock Exchange Group Plc agreed to buy Canada’s TMX Group Inc. this month and Singapore Exchange Ltd. offered $8.3 billion in October to acquire ASX Ltd. of Sydney.

“The dynamics are so perfectly aligned that literally anybody could team up and counterbid for NYSE,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC. “Nasdaq doesn’t want to be left out in the cold. The odds are pretty good that somebody else could come into the fray.”

Preliminary Stage

The discussions held between Nasdaq OMX and ICE are at a preliminary stage and aren’t likely to lead to an offer, the person familiar said, speaking on condition of anonymity because the talks are private.

Frank De Maria, a spokesman at Nasdaq OMX in New York, declined to comment, as did Atlanta-based ICE’s Kelly Loeffler. Richard Adamonis, a spokesman at New York-based NYSE Euronext, and Deutsche Boerse’s Ruediger Assion also declined to comment.

Deutsche Boerse, which traces its roots back to the Frankfurt Stock Exchange and the medieval fairs of the 11th century, on Feb. 15 announced the NYSE Euronext deal that will give its shareholders 60 percent of the combined company. NYSE Euronext’s owners will get 0.47 shares in the merged entity for each share they own.

NYSE Euronext traded at $36.93 today, $1.23 cents more than the implied takeover price of $35.70 a share based on the value of Deutsche Boerse’s stock in Xetra trading at the same time, according to data compiled by Bloomberg.

Takeover Premium

The price difference resulted in a takeover premium for NYSE Euronext of about minus 3.2 percent, widening from yesterday’s record. Before yesterday, the premium had never exceeded minus 2.1 percent, the data show.

While NYSE Euronext fell 3 percent yesterday as violence in Libya spurred the Standard & Poor’s 500 Index’s biggest decline since August, options traders are paying a record premium on speculation shares of the exchange will climb.

Options that are 10 percent above the stock price have soared relative to contracts 10 percent below the share level, pushing implied volatility, the key gauge of option prices, for calls to buy the stock to a record 1.10 times the level for puts to sell, data compiled by Bloomberg show.

“The market believes that the outcome will be a higher bid,” said Bouhari Arouna, an equity derivatives strategist at BNP Paribas SA in New York. “It’s definitely off the charts. When people buy a lot of upside calls you see this type of thing happen where the upside volatility gets jacked up significantly higher than downside. Usually it’s the other way around.”

Options Trading

The three-month NYSE calls have an implied volatility of 32.23, compared with 29.35 for puts that expire at the same time. The level for calls hasn’t exceeded puts since July 2007, when NYSE Euronext shares went on to rally 19 percent in the next three months.

Traders are making more bullish wagers than any time in the past two years, while the fastest growing bet is on a 12 percent gain to $41 next month. The number of outstanding calls to buy the stock has risen faster than the number of puts to sell since the deal was announced, pushing the ratio of calls to puts to 1.64, the highest since January 2009.

Open interest for March $41 calls has jumped by 2,975 contracts to 5,634 outstanding options since Feb. 17 for the largest net gain among all NYSE options, according to data compiled by Bloomberg. The shares haven’t closed above $41 since September 2008. NYSE Euronext rose 0.4 percent to $36.80 in U.S. composite trading today.

Three Equity Markets

A Nasdaq OMX bid for NYSE Euronext would create a combined company that would be home to all stock and exchange-traded fund listings in the U.S. It would gain control of NYSE Euronext’s three equity markets where companies and ETFs raise money. The combination would deliver almost 45 percent of U.S. trading volume, according to data compiled by London-based Barclays Plc.

In a takeover, Nasdaq OMX would also get almost half of U.S. equity options trading, which has higher margins than stock trading, data from Chicago-based Options Clearing Corp. show.

“I’m not banking on another bid,” said Peter Lobravico, vice president of merger arbitrage trading and sales at Wall Street Access in New York. He said that Nasdaq OMX, which a market capitalization of $4.9 billion, was too small to come up with an offer on its own.


ICE, which has a market value of $9 billion, is similar in size to NYSE Euronext’s $9.6 billion capitalization and one of two U.S.-traded exchanges that could make an offer, according to Bill Kavaler, a special situations analyst at Oscar Gruss & Son Inc. in New York.

CME Group Inc., the world’s largest futures market, is the other possibility, although both bids are unlikely, he said.

While Chicago-based CME said on Feb. 15 that it is aiming to grow its business organically, it may bid for NYSE Euronext to gain the derivatives business, leaving Nasdaq OMX the stock trading operations, according to WallachBeth Capital’s Oshodi.

Michael Shore, a spokesman for CME, declined to comment.

Elsewhere in mergers and acquisitions, Zurich Financial Services AG, Switzerland’s largest insurer, agreed to buy 51 percent of Banco Santander SA’s insurance business in Brazil, Mexico, Chile, Argentina and Uruguay for as much as $2.1 billion. The Zurich-based company will make an initial payment of $1.67 billion.

Santander, Forest Laboratories

Santander will receive as much as $420 million over the next 25 years depending on the performance of the unit, Zurich Financial said yesterday.

Forest Laboratories Inc. agreed to buy Newton, Massachusetts-based Clinical Data Inc. for $966 million, including net debt, to gain the new antidepressant Viibryd. Forest Laboratories of New York will pay $30 a share in cash and as much as an additional $6 a share if the drug meets certain sales goals, the companies said yesterday in a statement.

There have been 3,372 deals announced globally this year, totaling $330.5 billion, a 35 percent increase from the $244.8 billion in the same period in 2010, according to data compiled by Bloomberg.

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