Nasdaq Stakes NYSE Offer on 74% More Cost Cuts Than Rival
Nasdaq OMX, the second-largest U.S. bourse operator, and IntercontinentalExchange Inc. made an unsolicited bid of about $11.3 billion for the owner of the New York Stock Exchange yesterday, saying they will eliminate about $740 million in expenses in three years. That’s 74 percent more than Frankfurt-based Deutsche Boerse predicted in its all-stock agreement with NYSE Euronext CEO Duncan Niederauer in February.
Greifeld, who joined Nasdaq OMX in 2003, is betting overlap between the American companies will give him an advantage as the merged entity tries to squeeze out extra profit. The 53-year-old CEO has done it before, lowering costs at New York-based Nasdaq OMX to 59 percent of revenue last year from 68 percent in 2006 while buying more than a dozen companies.
“No one has been better than Nasdaq at acquiring and efficiently integrating companies,” said Justin Schack, managing director in charge of market structure analysis at Rosenblatt Securities Inc. in New York. “Bob is very, very disciplined and very focused on managing things as efficiently as possible. In past acquisitions, they were able to under-promise and over-deliver on the cost savings, and as a result they got a ton of credibility from the market.”
Nasdaq OMX had been left out of exchange mergers since October, when Singapore Exchange Ltd. (SGX) offered A$8.35 billion ($8.66 billion) for Sydney-based ASX Ltd. (ASX) In addition to the Deutsche Boerse offer in February, London Stock Exchange Group Plc (LSE) said that month that it would buy Canada’s TMX Group Inc. for 1.94 billion pounds ($3.13 billion). The announced value of the deals totaled about $21 billion, Bloomberg data show.
Nasdaq OMX shares rose 9.3 percent, the most since March 2009, to $28.23 at 4 p.m. in New York yesterday. NYSE Euronext surged 13 percent to $39.60, the highest price since October 2008. That’s 12 percent higher than the Deutsche Boerse offer, valued at $35.44 as of 5:20 p.m. The Nasdaq OMX bid, which has yet to be approved by its shareholders, comes to $42.92 a share, up from $42.50 when announced.
Greifeld offered about $2.8 billion in stock and $2.1 billion in cash and said Nasdaq OMX would assume $2.1 billion in NYSE Euronext debt in exchange for NYSE’s U.S. listings, equity and options businesses, according to a presentation yesterday. ICE (ICE), based in Atlanta, offered $4.7 billion of its stock and $1.7 billion in cash, assuming no NYSE Euronext debt, for a total of about $6.3 billion for the Liffe futures unit.
Nasdaq OMX’s share of the cost savings would be about $610 million, according to a presentation yesterday. The company also projected $20 million in revenue synergies and said it would generate $90 million in savings for customers, such as company issuers, trading firms and investors.
“This is a conservative estimate” based on public information and could be revised higher if Nasdaq OMX gains access to NYSE Euronext’s private financial data, Greifeld said on a conference call with analysts yesterday.
There may be opportunities to save money in over-the-counter markets, Greifeld said. Nasdaq OMX would shift NYSE Euronext’s equity trading to the Inet system and conduct all stock transactions from both companies in a single data center, Eric Noll, executive vice president for transaction services at Nasdaq OMX, said in an e-mail yesterday.
ICE said it estimates $200 million in savings at the futures business, about half from clearing and half from operational costs.
“We have not had a chance to do due diligence on the deal, so we’ve had to work off of public filings,” Jeff Sprecher, chief executive officer of ICE, said in an interview yesterday. The cost savings are “conservative” and “we may be able to find more savings opportunities if we get a hard look” at NYSE’s books, he said.
The $740 million total cost savings may end up being too high, said Thrivent Asset Management’s Stephan Petersen. The overestimation could hurt Nasdaq OMX’s offer and add fuel for Deutsche Boerse to push its agreement, he said.
“Nasdaq and ICE are pushing the envelope in terms of the cost savings,” said Petersen, a Minneapolis-based senior equity analyst at Thrivent, which oversees $70 billion. “They’re on the high end of what people were expecting. Deutsche Boerse will use this to undermine the bid. Nasdaq and ICE are stretching the numbers to get to the offer price and make the deal look good to their shareholders.”
Sweden, Denmark, Finland
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. It produced net income of $395 million in 2010, which is 26 percent of the company’s $1.5 billion in net revenue for the year.
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. Income amounted to 22 percent of its $2.5 billion in net revenue.
The Deutsche Boerse deal, valued at $9.26 billion as of yesterday, creates the world’s largest exchange operator. It carries a 250 million ($356 million) breakup fee, increasing the cost of Nasdaq OMX and ICE’s bid by about $1.35 a share, said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global in New York.
Jumping to Fourth
ICE shares slipped 3.1 percent to $119.75 yesterday. The second-largest U.S. futures market would purchase NYSE Euronext’s Liffe futures markets, catapulting to fourth from 14th in terms of global trading volume. ICE specializes in energy and commodities trading, with its only offering in financial products coming from currencies and equity indexes at its New York-based ICE Futures U.S. exchange. It produced $1.15 billion in revenue last year, with net income at 35 percent of that total. CME Group Inc. of Chicago is its bigger rival.
While ICE already handles commodity contracts in Europe, buying NYSE Liffe would give it financial futures such as Euribor three-month contracts, which are similar to Eurodollars that track short-term interest rates. Liffe U.K. also offers futures trades on bonds. Eurodollars traded at CME, the world’s largest futures market, were the most-actively bought and sold interest-rate future in 2010, according to the Futures Industry Association.
“The opportunity is a combination of things,” Sprecher said. “We don’t have a natural way into interest rates, and it’s one of the older financial futures franchises, so the incumbents have a strong natural position.”
A combined Nasdaq OMX-NYSE Euronext would add to earnings within the first year to 18 months after the deal closed, Nasdaq OMX said yesterday. After that, Nasdaq OMX estimates earnings will climb by an extra 10 percent as units become fully integrated. For ICE, the Liffe acquisition would add to profit in the second year following its completion. The companies said the joint bid with cash and stock would also leave them the flexibility to pursue more initiatives without the financial restraint had they bid individually.
If joined, Nasdaq OMX and NYSE Euronext will earn 30 percent to 35 percent more in 2015 than they would if they remained separate, Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, wrote in a note yesterday. For ICE and Liffe, profitability would climb by 10 percent to 15 percent, he said.
Nasdaq OMX would be able to cut about 50 percent of expenses in U.S. derivatives and cash trading, 42 percent in European equities and 25 percent in technology, as well as 65 percent of corporate expenses, he said.
Greifeld 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 to 69 percent of net revenue from 79 percent during the same period, the data show.
At ICE, Sprecher made an unsolicited bid for the Chicago Board of Trade in 2007, forcing the Chicago Mercantile Exchange to raise its offer to $11.2 billion from $8 billion. After Merc won and purchased CBOT, the company renamed itself CME Group. Sprecher, 56, founded ICE in 2000.
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 19 percent in 2011, compared with the 3 percent gain for the Bloomberg gauge. NYSE Euronext has fallen 51 percent since March 8, 2006, its first trading session as a public company. It gained 19 percent in 2010 and 32 percent in 2011.
“Our board will consider the new proposal and do the right thing for our shareholders and other stakeholders,” Niederauer wrote in an e-mail to employees yesterday, according to a regulatory filing. “In the meantime, we remain fully committed to our previously announced deal with Deutsche Boerse,” and plan to hold a shareholder vote in July, he said.
ICE shares have advanced more than fourfold since they began trading in November 2005. They are up 0.5 percent in 2011 after a 6.1 percent advance in 2010.
Nasdaq OMX and NYSE Euronext would have a monopoly on listing stock in the U.S. Charges to companies selling shares 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. Bats Global Markets said this week it filed plans to start letting companies list shares on its U.S. venues in the fourth quarter.
Because the Nasdaq OMX bid would create a monopoly on listing corporations in the U.S., it is likely to raise U.S. Justice Department concerns that the deal would be anticompetitive, said Herbert Hovenkamp, a professor at the University of Iowa College of Law in Iowa City. He added that the proposed acquisition poses less of a problem should the Justice Department view the deal in the context of the worldwide market for listed stocks.
Half of Trading
Combined, NYSE Euronext and Nasdaq OMX would have about 48 percent of U.S. equity trading. They have struggled to keep market share since Kansas City, Missouri-based Bats Global Markets 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.
“Nasdaq and NYSE -- they run computing businesses, so it’s like the two lemonade stands, where they only have to have on compliance department, one set of infrastructure, they can do the same thing with greater economies of scale if they merge,” said Alison Crosthwait, Instinet’s director of global trading research in Toronto. “There’s not the ambiguous synergies like DB-NYSE, and I can understand how NYSE-Nasdaq will be able to save money. This deal offers very immediate short term gains.”
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