European Union regulators vetoed Deutsche Boerse AG and NYSE Euronext’s plan to create the world’s biggest exchange after concluding that the merger would hurt competition.
The deal would have led to a “near-monopoly” in European exchange-traded derivatives, the European Commission said in an e-mailed statement today. Any savings would “not be substantial enough to outweigh the harm to customers caused by the merger.” Both exchanges said they will focus on standalone strategies and are negotiating to terminate the merger, without ruling out an appeal.
Deutsche Boerse agreed to acquire its New York rival in a deal valued at $9.5 billion when it was announced last February. Since then, the value has plummeted to about $7.45 billion as Deutsche Boerse’s shares fell before today. The companies appealed directly to commission President Jose Manuel Barroso last month to try to salvage their merger, arguing that a ban would harm European exchanges and drive business to other parts of the world.
“This is a black day for Europe and for its future competitiveness on global financial markets,” Deutsche Boerse said in an e-mailed statement. The “decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in the market for derivatives. We therefore regard the decision as wrong.”
Deutsche Boerse advanced 1 percent to 45.653 euros in Frankfurt trading.
The merger prohibition is the commission’s fourth since 2004, when it overhauled its rules for reviewing deals. The ruling can be challenged by the companies in the EU courts. Appealing a merger decision is an attack on the commission’s legal reasoning and doesn’t say anything about whether companies intend to resurrect a deal.
“Any challenge is likely to center on whether off-exchange or over-the-counter exchanges compete against Deutsche Boerse and NYSE Euronext’s derivatives exchanges,” Emanuela Lecchi, a London-based lawyer at Watson, Farley & Williams LLP, said in an e-mail. “This is not an easy challenge” and could take several years.
NYSE Euronext won’t have to pay a break-up fee of 250 million euros ($329.8 million), Chief Executive Officer Duncan Niederauer said in an interview today. The exchange will consider its options, he said, declining to comment on whether he will bid for the London Metal Exchange or LCH.Clearnet Group Ltd. An appeal of the ruling to the EU courts “is an option going forward,” he said.
The veto “really sends a message to the whole industry,” Niederauer said. “An industry that should consolidate has run into unanticipated resistance.”
The EU’s antitrust chief Joaquin Almunia blocked the deal “to protect the European economy from the perverse effects of a combination that would have practically eliminated effective competition in the market,” he told reporters.
Deutsche Boerse’s Eurex, the region’s biggest derivatives exchange, and NYSE’s Liffe “compete head-to-head and are each other’s closest competitor,” Almunia said. Exchange-traded derivatives and over-the-counter derivatives are “simply different products,” he said, rejecting the companies’ arguments that they share the same market.
The Association for Financial Markets in Europe, a group that represents lenders and brokers including Goldman Sachs Group Inc., Bank of America Corp., Deutsche Bank AG and UBS AG, said regulators “reached the correct decision” because “potential benefits were undermined” by competition concerns.
There were “serious” antitrust problems on derivatives on European interest rates, European single equities and European equity indices, Almunia said. CME Group Inc., the owner of the world’s largest futures exchange, offers little real rivalry to the Deutsche Boerse or NYSE for these derivatives, he said.
Deutsche Boerse’s acquisition of NYSE Euronext would have put more than 90 percent of Europe’s exchange-traded derivatives market and about 30 percent of stock trading in the hands of one company.
Almunia also cited concerns over access to clearing because the model used by Deutsche Boerse and NYSE Euronext would create “major barriers” to any future rivals.
He said customers prefer “to stay on exchanges where they can pool margin and thereby save collateral” and as a result “there is simply no prospect of CME or any other player” posing any real rivalry in the near future.
Antitrust concerns have thwarted other exchange tie-ups around the world. Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. abandoned an unsolicited bid for NYSE Euronext after the U.S. Justice Department threatened to sue. Singapore Exchange Ltd.’s $8.8 billion bid for ASX Ltd. collapsed after Australian Treasurer Wayne Swan said the deal wasn’t in the national interest.
The commission said offers by NYSE Euronext and Deutsche Boerse to sell overlapping businesses and give rivals access to post-trade services were “inadequate.”
NYSE Euronext wouldn’t agree “to any concessions that would compromise or undermine the industrial and economic logic of the proposed combination,” NYSE Euronext Chairman Jan-Michiel Hessels said in a statement. NYSE said it would now focus on its “successful standalone strategy.”
NYSE said it will resume a $550 million stock repurchase program after it reports earnings on Feb. 10 and after the agreement is formally terminated. Deutsche Boerse reports earnings Feb. 13.
“I fully expect consolidation to continue in the industry,” said Richard Perrott, an analyst at Berenberg Bank in London. “This last year was a disaster for the exchanges that wanted to merge, but in this deal it was clear from the start it was going to be tricky. You were looking to combine the two dominant derivatives exchanges in Europe.”