Justice Department Seeks Data in Nasdaq-NYSE Antitrust Study

Nasdaq, ICE Announce Exchange Offer for NYSE
Trading activity is displayed on electronic boards at the Nasdaq MarketSite in New York. Photographer: Jin Lee/Bloomberg

The U.S. Justice Department is querying market participants about how a takeover of the New York Stock Exchange would affect competition in equity listings.

Officials are asking how different outcomes for NYSE Euronext would affect companies trying to raise money in the U.S., according to a person with direct knowledge of the matter who declined to be named because the conversations are private. NYSE Euronext agreed to a $9.5 billion merger with Deutsche Boerse AG in February. It’s trying to fend off an unsolicited bid by Nasdaq OMX Group Inc. and IntercontinentalExchange Inc.

Antitrust review is emerging as a key test in the battle for the 219-year-old market, which Nasdaq OMX Chief Executive Officer Robert Greifeld tried to snatch away from Deutsche Boerse with an $11.3 billion offer on April 1. Giving Nasdaq control would create a monopoly in listings, a prospect that may create undue risk the takeover will be blocked, according to NYSE CEO Duncan Niederauer.

“A Department of Justice review can be quite significant to a deal given that antitrust regulators have the legal authority to sue to block transactions they deem anticompetitive,” said Gregory Neppl, a Washington-based attorney at Foley & Lardner LLP. “That can force parties to modify the transaction in a material way, abandon it or litigate with the government over the antitrust legality of the transaction.”

Nasdaq OMX may consider selling the NYSE Amex business to allay competition concerns, a person familiar with the matter said April 15. NYSE Amex, home to more than 500 stocks, is one of four main listing venues in the U.S., including the Big Board, which offers all except three companies in the 30-member Dow Jones Industrial Average, the Nasdaq Stock Market, and NYSE Arca, which provides exchange-traded funds.

Game Theory

“As we game-theory all the options that might be available to us in the future, it certainly would be on the table,” Greifeld said in a telephone interview yesterday. He added that the exchange company’s “discussions with the DOJ will speak to the merits of having the combined listing franchise.”

Scott Cutler, executive vice president and co-head of U.S. listings at NYSE Euronext, said separating the Amex listings business from a combined NYSE-Nasdaq company wouldn’t improve competition in the listings business or give U.S. issuers more choice about where to offer their shares.

“If the concern is antitrust, this does little to resolve that,” he said in an interview on April 17. Most companies that have initial public offerings in the U.S. list on Nasdaq or NYSE, “so you’re not improving issuer choice by not having Amex owned by either of them,” he said.

Forced Listings

Companies also can’t be forced to maintain their share listings on venues they don’t choose, Cutler said. Competition between Nasdaq and NYSE has led them to offer services such as data analytics, branding, corporate-governance rules and other products. A separate Amex would offer no such services, he said.

NYSE Euronext rejected the Nasdaq OMX-ICE bid on April 10, saying it wouldn’t create enough long-term value for shareholders even though it was worth 15 percent more than Deutsche Boerse’s February agreement to combine with the company at 10:45 a.m. New York time today. A Nasdaq OMX-ICE deal would give the listings business and equities and options trading in the U.S. and Europe to Nasdaq while ICE would get the Liffe derivatives operations on both continents.

Breakup Fee

Nasdaq OMX and ICE offered to pay NYSE Euronext $350 million if antitrust authorities blocked the proposed takeover, they said yesterday in a letter to NYSE Euronext’s board. The companies have had “several meetings in the last week” with the Justice Department in which they provided information about the industry, data and customer contacts, Greifeld said in yesterday’s interview. ICE Chief Executive Officer Jeffrey Sprecher said in the interview he’s been in touch with European competition authorities about acquiring Liffe.

Nasdaq OMX needs to prove that consolidating U.S. listing venues within one company wouldn’t give it the power to raise annual listing fees or reduce services for issuers, Neppl said. If a competition problem emerges, Nasdaq OMX could work with regulators to seek a remedy to preserve the deal, he said.

Regulators will also want to know whether a combination would give the entity more power to raise trading fees for customers, although that’s a “smaller concern” since many rivals vie for that business, Neppl said.

Christine Varney, head of the Justice Department’s Antitrust Division, said in an April 14 interview in Washington that her unit is reviewing the NYSE Euronext-Deutsche Boerse deal. Regulators focused on competition in Europe are also looking at that deal since it creates a monopoly in fixed-income derivatives trading by combining NYSE Euronext’s Liffe business and Deutsche Boerse’s Eurex futures operation.

Europe Antitrust

“Competition issues in Europe are probably more significant because it’s harder to demonstrate competition in the listed derivatives space,” said Niki Beattie, CEO of Market Structure Partners Ltd., a London-based consulting firm that advises brokers and exchanges. “Their customer base appears very concerned about what a combination of these two organizations will mean for them.”

Greifeld said on an April 1 conference call that acquiring NYSE would spur more foreign companies to go public in the U.S. Since then, he has also talked about decreasing to $450,000 the current maximum annual listing fee the largest companies pay NYSE, according to the person with knowledge of the matter who spoke on April 15.

NYSE’s listing and annual fees, based on the number of shares outstanding, are capped at $500,000 a year. About 80 percent of NYSE-listed companies pay between $100,000 and $200,000 a year, according to Christiaan Brakman, a spokesman for NYSE Euronext. Nasdaq’s highest charge is $99,500 annually, according to data on the company’s website.

Overseas Competition

Competition with the Hong Kong Exchanges & Clearing Ltd., London Stock Exchange Group Plc and other venues that list stock has led U.S. IPOs to fall to about 11 percent last year, from 18 percent 10 years earlier, according to data compiled by Bloomberg. The U.S. accounted for 17 percent of the $286 billion raised globally last year in IPOs, compared with 57 percent of global IPOs in 2000.

“We have a fractured message coming out of the U.S. and this transaction will allow us to be clearly globally competitive for these large IPOs that we’re not currently competing for,” Greifeld said on the April 1 conference call. He cited the decision of executives at Italian fashion company Prada Holding SpA to list shares in Hong Kong. Economists would characterize the listings contest between NYSE and Nasdaq as “non-essential competition,” he said yesterday.

More IPOs

NYSE Euronext’s Cutler said a takeover by Nasdaq OMX wouldn’t augment the ability of U.S. exchanges to get more IPOs from other countries since both markets already compete “fiercely” for the business. Discussing how to win foreign companies also doesn’t help U.S. issuers by giving them more choice about where to list, he said.

U.S. companies are asking whether annual fees would rise and how the cost of services they get from the markets would change should Nasdaq OMX prevail, said Jeff Morgan, chief executive officer of Vienna, Virginia-based National Investor Relations Institute.

“If Deutsche Boerse and NYSE merge, that company’s going to have a full complement of equities, derivatives and listings and issuers will be a smaller part of that,” said Morgan, whose organization represents corporate officers from about 2,000 public companies. “A Nasdaq-NYSE merger would focus mainly on cash equities, which would put issuers in a more prominent role, but would lose the competition and what has been built up over the years by two very strong, very different offerings.”

Floor Future

NYSE-listed companies also want to know whether the trading floor in lower Manhattan and the exchange’s system of individual market makers for stocks would be maintained, according to Morgan. Greifeld said on the April 1 conference call that he would keep the floor open.

“Our kneejerk reaction is probably indifferent to somewhat bad,” said Mary Jensen, vice president for investor relations at NYSE-listed Douglas Emmett Inc., a real estate investment trust based in Santa Monica, California. “If they’re combined, they could charge what they want. Right now there’s competition between the two.”

Patrick Healy, a former executive at Bear Stearns Cos. who runs Chevy Chase, Maryland-based Issuer Advisory Group LLC, which helps companies decide where to list their stock, said he’d support the deal for NYSE Euronext that leads to lower fees for companies that issue stock. NYSE and Nasdaq have profited from increased trading without offering “fee relief” to issuers, he said.

Emerging Venues

Bats Global Markets, the third-largest U.S. exchange operator by volume traded, said last month it plans to start a listings business for stocks and ETFs this year. The Kansas City, Missouri-based company runs equities and options markets in the U.S. and a stock-trading venue in Europe. Direct Edge Holdings LLC, which operates two U.S. exchanges, is considering a listings business, Chief Operating Officer Bryan Harkins said on March 31. Direct Edge is in Jersey City, New Jersey.

In addition to providing a stable source of revenue, listing companies usually gives an exchange operator a bigger share of trading in those stocks. NYSE Euronext’s portion of stocks listed on NYSE was 35 percent last month, compared with an average of 27 percent for all U.S. volume, according to data compiled by Barclays Plc. Nasdaq OMX traded 30 percent of Nasdaq-listed securities in its markets, while its overall average was 20 percent.

Ideological Split

For some U.S. firms that list their shares on NYSE, support for the two merger combinations is splitting on ideological grounds, Healy said, citing conversations with several dozen firms.

“Those supporting the Deutsche Boerse deal are free-market people who believe in global markets,” he said. “They believe this would form the beginning of a global network with, ultimately, the ability to list and trade shares around the globe.”

The other group is “pro-America” and doesn’t like the idea of a takeover by a German company, he said. “They’re tired of seeing the U.S. come in second, losing listings to foreign markets like Prada listing in Hong Kong rather than New York,” Healy said. “They think that by putting NYSE and Nasdaq together that would be a more favorable domestic powerhouse.”

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