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Nasdaq CEO Greifeld Prefers Cost Reductions to Size at NYSE

CEO of Nasdaq OMX Group Robert Greifeld
Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc. Photographer: Ramin Talaie/Bloomberg

Nasdaq OMX Group Inc., so far absent from the wave of mergers that has swept equity exchanges around the world, may be looking at cost cuts more than expansion in its pursuit of NYSE Euronext.

Nasdaq OMX of New York is in talks with lenders to fund a possible bid for NYSE Euronext to counter Deutsche Boerse AG’s more than $8.7 billion proposal, said two people with knowledge of the matter. The company is working with IntercontinentalExchange Inc. on a potential offer that would dismember the owner of the New York Stock Exchange, said one of the people, who declined to be identified because the matter is private.

While Frankfurt-based Deutsche Boerse’s agreement to purchase the NYSE Euronext reflects a reach for global scale, Nasdaq OMX’s may cut overseas operations. Chief Executive Officer Robert Greifeld, 53, would be able to reduce expenses by eliminating competition in stock listings and reducing it in equities and options trading after cutting costs to 59 percent of revenue from 68 percent over the last five years.

“Greifeld is considered an excellent cost-cutter and an accomplished acquirer and integrator,” New York-based Ed Ditmire of Macquarie Group Ltd., the top-ranked analyst on Nasdaq OMX, NYSE Euronext and ICE based on the profitability of his recommendations in data compiled by Bloomberg, said in an interview yesterday. “By wanting to acquire the parts that mirror its own business, they’ll have the maximum overlap and maximum redundancies.”

Options, Equities

An offer from Nasdaq OMX and ICE may total as much as $45 a share, 23 percent above NYSE Euronext’s close yesterday of $36.55, Ditmire wrote today. ICE would pay $25 a share for NYSE’s European derivatives business, while Nasdaq would offer $20 a share for the rest, according to the note. NYSE Euronext rallied 1.3 percent to $37.02 at 4 p.m. in New York today.

Nasdaq OMX owns 12 equity and options markets in the U.S. and Europe including the Nasdaq Stock Market, Nasdaq Options Market and venues in Sweden, Denmark, Finland, Iceland, Estonia, Latvia and Lithuania. NYSE Euronext’s divisions include the New York Stock Exchange, the Euronext platform that handles shares in the Netherlands, Belgium, Portugal and France, and the European derivatives platform known as NYSE Liffe.

To fund the offer, Nasdaq OMX would raise about $5 billion in debt from lenders led by Charlotte, North Carolina-based Bank of America Corp. and $5 billion in asset sales, DealReporter said yesterday, citing a person familiar with the situation. Atlanta-based ICE would buy European assets from NYSE Euronext, DealReporter said.

Left Out

Frank De Maria, a spokesman for Nasdaq OMX, NYSE Euronext’s Ray Pellecchia, ICE’s Lee Underwood, Bank of America’s John Yiannacopoulos and Deutsche Boerse’s Naomi Kim declined to comment yesterday.

Nasdaq OMX, the second-biggest U.S. stock exchange operator, has been left out of merger agreements since October that encompassed NYSE Euronext, Deutsche Boerse, London Stock Exchange Group Plc, Canada’s TMX Group Inc., Singapore Exchange Ltd. and Australia’s ASX Ltd. The announced value of those deals totaled $21 billion, Bloomberg data show.

Greifeld joined Nasdaq OMX in May 2003 and began acquiring companies in 2005, with the purchase of the Inet electronic market. He cut a third of the company’s staff that year, vacated surplus office space and turned to lower-cost computer systems to handle trading. Expenses fell about 9 percentage points relative to sales between 2006 and last year, data compiled by Bloomberg show. At NYSE Euronext, costs fell from 79 percent of net revenue to 69 percent over the same period, the data show.

Cost Cutters

“Nasdaq would handle the synergies and the potential cost-cuts probably better, because it is primarily domestic entities combining together,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion. “It might make a lot of sense, but it still leaves open the issue of the globalization of investing and how the combined Nasdaq-NYSE is going to address that.”

Greifeld would have to convince NYSE Euronext shareholders that his offer is superior to Deutsche Boerse’s bid, which was valued at $33.97 a share as of 4 p.m. in New York today. NYSE Euronext jumped 4.5 percent to $36.55 yesterday on speculation of a higher offer. The NYSE Euronext combination with Deutsche Boerse includes a 250 million euro ($350 million) fee for terminating the deal.

Shares Quadrupled

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. The stock is up 8.8 percent in 2011, compared with the 2.9 percent decline for the Bloomberg gauge. NYSE Euronext has fallen 54 percent since March 8, 2006, its first trading session as a public company. It gained 19 percent in 2010 and 23 percent in 2011.

Nasdaq OMX and NYSE Euronext would have a monopoly on listing stock in the U.S. Charges to companies selling stock accounted for 17 percent of 2010 net revenue at NYSE Euronext and 19 percent in the fourth quarter for Nasdaq OMX, according to reports from the companies.

The new entity would have about 48 percent of U.S. equity trading. NYSE Euronext and Nasdaq OMX have struggled to keep market share since Bats Global Markets in Kansas City, Missouri, and Jersey City, New Jersey-based Direct Edge Holdings LLC started their own 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.

Options Share

Market share would be higher in equity options, at 53 percent, according to 2010 data from Chicago-based Options Clearing Corp. The largest U.S. derivatives market is the CBOE Holdings Inc.’s Chicago Board Options Exchange, which had 29 percent last year.

Combined, NYSE Euronext and Deutsche Boerse would be the world’s largest exchange operator. The company would manage futures exchanges with volume about the same as Chicago-based CME Group Inc., the biggest venue for the contracts in the U.S.

NYSE Liffe, NYSE Liffe US, Eurex and five NYSE Euronext markets that trade futures and options together executed about 3.1 billion contracts last year, the same as CME’s three futures exchanges, according to data from the Futures Industry Association, a Washington-based trade group representing Wall Street banks. The data exclude trading in U.S. options markets, which don’t handle futures.

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, Deutsche Boerse and CBOE, said Deutsche Boerse’s offer is more logical than a bid from Nasdaq OMX.

‘See the Synergies’

“I can see the synergies in Deutsche Boerse and NYSE,” he said. “This creates a significant powerhouse in Europe with some pretty good margins. I can see a rationale there. I don’t know that the same rationale holds for a Nasdaq and NYSE Euronext merger. If I were Bob Greifeld, I would want to go for a higher-margin business in America,” such as CBOE, he said.

Nasdaq OMX shares have a market value of $4.55 billion, 9th out of 23 companies in the Bloomberg World Exchanges Index, where the average value is $5.3 billion. NYSE Euronext is valued at $9.67 billion and Deutsche Boerse is worth $14.1 billion, data compiled by Bloomberg show.

“Nasdaq certainly brings some advantages because the two combined would dominate all the U.S. trading,” said Dallas-based Jeff Middleswart, who owns about 30,000 shares of Nasdaq OMX and 18,000 of NYSE Euronext and is president of research firm Behind the Numbers LLC. “With operations in the same area, it’d be easier to reduce costs faster. There’s greater immediate cost savings from a Nasdaq deal and a greater revenue synergies with Deutsche Boerse.”

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