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NYSE Euronext Holders Approve Takeover by Deutsche Boerse

NYSE Euronext Holders to Vote on Deutsche Boerse Takeover
U.S. flags fly outside of the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

NYSE Euronext shareholders approved its $9.39 billion takeover by Deutsche Boerse AG, another step toward completing a deal that would create the world’s biggest bourse operator.

Owners holding 66 percent of NYSE Euronext shares backed the agreement, surpassing the 50 percent needed to approve the deal announced in February, according to preliminary figures released after a meeting today in New York. The all-stock transaction would give Frankfurt-based Deutsche Boerse 60 percent of the combined entity, while NYSE Euronext Chief Executive Officer Duncan Niederauer will run the organization.

Approval clears one of three main obstacles for the takeover. Also pending is the July 13 deadline for at least 75 percent of Deutsche Boerse holders to favor the plan. European regulators, who set an initial deadline of Aug. 4 to rule on the deal, are reviewing the transaction because it would unite venues that handle more than 90 percent of the region’s exchange-traded derivatives.

“This is the first concrete step in terms of getting the deal consummated,” said Sang Lee, managing partner at Boston-based Aite Group LLC. “The next hurdle is on the Deutsche Boerse side, which has a higher threshold. The most difficult part would be the regulatory restrictions and haggling with regulators to get this through.”

Dividend Enticement

NYSE Euronext and Deutsche Boerse have agreed to pay a one-time dividend of 620 million euros ($890 million). The final NYSE Euronext vote is scheduled to be announced tomorrow.

NYSE Euronext shares rose 3 percent, the most since April 1, to $35.40 at 4 p.m. in New York. They have gained 6 percent since the companies confirmed on Feb. 9 that they were in merger discussions. Deutsche Boerse advanced 2.4 percent to 54.50 euros, trimming its decline in the past five months to 5.1 percent.

Today’s vote “gives us a lot of confidence” that Deutsche Boerse holders will back the deal next week, Niederauer said at the meeting. “Assuming that goes the way we think it will, we’ll have the opportunity to spend the rest of the year trying to get through the regulatory process and get down to the business of creating value for shareholders.”

NYSE Euronext’s share of trading in NYSE-listed stocks has shrunk to 35 percent from as much as 82 percent as technology and regulatory changes enabled electronic competitors to grow. The company is merging with Deutsche Boerse in an effort to expand revenue from derivatives, such as options and interest-rate swaps, because they offer a higher profit margin.

Not Sad

“There’s this sentiment out there that we’re not what we were, and that’s right, we’re not,” Niederauer said in a May 31 interview. “The NYSE doesn’t want to be what it was. The game changed. We’re obliged to get into new services, new products, new asset classes, new regions. If we do that successfully, that’s a great story, not a sad story.”

There has been $37 billion of exchange merger announcements since Singapore Exchange Ltd. said Oct. 25 that it would pay A$8.35 billion ($8.99 billion) for ASX Ltd., according to Bloomberg data that include planned, unsolicited and terminated bids. The Australian government rejected the Singapore deal in April. London Stock Exchange Group Plc dropped its 2.13 billion pound ($3.4 billion) bid for TMX Group Inc. last month, citing a lack of shareholder support.

Board Membership

NYSE Euronext and Deutsche Boerse held talks in late 2008 about a merger that ended without a deal. They restarted negotiations in August 2010, according to regulatory filings. The companies aimed for a premium of 10 percent or more than the NYSE Euronext stock price of $33.41 on Feb. 8, the filings show.

The deal was recommended by Glass Lewis & Co. and ISS Proxy Advisory Services, which last month said NYSE Euronext shareholders should vote for the takeover because they will hold “significant” board and management representation. Of 15 directors, six are set to be designated by NYSE Euronext. Niederauer is slated to be CEO, while Reto Francioni, the head of the German company, will be chairman.

“The proposed transaction developed through a lengthy process of sharpening the firm’s business strategy to anticipate the evolution of the exchange industry,” Stephen Farr, the primary analyst for ISS, wrote in the report dated June 24. “The deal will create the world leader in derivatives, capital raising markets, and capital markets infrastructure services.”

Combined Results

The combined company would have operations in 11 countries and generate 5.6 billion euros in sales and 869 million euros in earnings annually, according to a regulatory filing. Earnings before interest and taxes for the combined exchange would have been 1.1 billion euros for the year that ended Dec. 31.

NYSE Euronext-Deutsche Boerse would own three of the nine U.S. options exchanges, with 41 percent of the industry’s volume, according to data compiled by Chicago-based OCC. In addition to the three U.S. stock exchanges NYSE Euronext already owns, the company would have a 32 percent stake in Jersey City, New Jersey-based Direct Edge Holdings LLC, which runs two markets, putting five of the nation’s 13 equity exchanges under common ownership.

The deal may encounter resistance from European regulators, who could take issue with giving one firm control of the Eurex and NYSE Liffe derivatives markets, the two largest in Europe. Also, the joined entity would control about 29 percent of the region’s stock trading, according to data compiled by Lenexa, Kansas-based Bats Global Markets.

Issues, Complaints

“There are issues with combining Liffe and Eurex and there are some complaints on the equities side as well,” said Larry Tabb, founder of Tabb Group LLC, a financial-market research and advisory firm. “I’m not sure, if Deutsche Boerse and NYSE were forced to spin off any one or more of their predominant businesses, they’d continue with the merger.”

Discussions with regulators aren’t far enough along “to talk about major changes, divestitures, things like that,” Niederauer told reporters today. “None of that’s even come up yet, nor would it have come up yet.” He added that “a divestiture of a major part of the business is relatively unprecedented,” based on analysis of other deals.

Should the new company be asked to sell one of its derivatives businesses, such as Liffe or Eurex, as part of the regulatory approvals for the merger, going forward with the planned combination would be “hard to envision,” Niederauer told CNBC today.

Topping CME

NYSE Euronext and Deutsche Boerse traded or cleared 4.8 billion futures and options contracts last year, according to data including equity options and futures contracts from the Washington-based Futures Industry Association. That was more than Chicago-based CME Group Inc., which is in second place at 3.1 billion contracts.

The European Commission sent a survey with 165 questions to Deutsche Boerse rivals and customers, asking if the deal would reduce competition and what effect it would have on access to market data. The deadline to reply is today. Last week, the EU’s antitrust agency set the Aug. 4 deadline to rule on the deal.

“Europe remains the most significant regulatory hurdle to the transaction as a result of the near monopoly that would exist within the European interest-rate futures market,” Daniel Fannon, a San Francisco-based analyst at Jefferies Group Inc., wrote in a June 28 note. “A key consideration by European regulators will be Europe’s global position within the derivatives market post the transaction.”

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