NYSE Owners Reap Merger Gains After Trailing Market Since 2006
NYSE Euronext has become one of the stock market’s biggest winners in 2011, helped by speculation of a bidding war for the 219-year-old bourse.
NYSE Euronext shares have posted the 13th-biggest gain in the Standard & Poor’s 500 Index (SPX) this year, rising 32 percent, after Deutsche Boerse AG’s $9.26 billion takeover agreement was countered with an $11.3 billion bid from Nasdaq OMX Group Inc. (NDAQ) The stock is up 155 percent since the market bottomed on March 9, 2009, compared with a 97 percent advance in the S&P 500, according to data compiled by Bloomberg.
Investors and analysts say the gains may not be over because Frankfurt-based Deutsche Boerse, seeking to create the world’s largest exchange operator, has room to boost its all-stock proposal and rivals such as CME Group Inc. (CME) may be lured in. NYSE Euronext shares have trailed the S&P 500 by more than 45 percentage points since its first trading session as a public company in March 2006.
“Having people fight over you is obviously a good thing,” said Stephan Petersen, a Minneapolis-based senior equity analyst at Thrivent Asset Management, which oversees $70 billion. “I would not be surprised if Deutsche Boerse comes back with a modestly better offer and tries to shoot down the Nasdaq-ICE bid based on what they may call optimistic assumptions in terms of the cost savings.”
Deutsche Boerse’s bid for NYSE Euronext is “the best possible combination for both shareholder groups and the stakeholders of the companies,” Deutsche Boerse said in a statement. Richard Adamonis, a NYSE Euronext spokesman, declined to comment. Michael Shore, a spokesman for CME, said the company is focusing on its “core business.”
Nasdaq OMX and ICE’s unsolicited bid pushed NYSE Euronext up 13 percent to $39.60 in New York, while Nasdaq OMX rose 9.3 percent to $28.23 for the biggest gain since March 2009. Atlanta-based ICE slumped 3.1 percent to $119.75, and Deutsche Boerse slipped 1.4 percent to 52.81 euros.
The owner of the New York Stock Exchange has climbed 19 percent since Feb. 8, the day before the New York-based company and Deutsche Boerse said they were in merger talks. Deutsche Boerse has slid 8.1 percent.
Nasdaq OMX of New York and ICE (ICE) offered about $42.50 in cash and stock for each NYSE Euronext share, according to a statement yesterday, topping Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext that valued the company at $35.44 a share as of 8:13 p.m. in New York yesterday. Yesterday’s bid from Nasdaq OMX and ICE is now worth $42.92.
As part of the deal, ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets. The Deutsche Boerse deal, valued at $9.53 billion when announced in February and now worth $9.26 billion, would create the world’s largest exchange operator with venues in the U.S. and Europe.
Nasdaq OMX, the second-largest U.S. bourse operator, and ICE said 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.
The combination would give Nasdaq OMX a monopoly on listing corporations in the U.S., world’s largest capital market. That is likely to raise 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.
‘Threshold of Illegality’
If antitrust regulators limit their analysis of a combined exchange to the U.S. market, the merger would be “way over the threshold of illegality,” Hovenkamp said in a phone interview. 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, he said.
NYSE Euronext is studying the proposal, according to a letter from Chief Executive Officer Duncan Niederauer to employees contained in a filing with the Securities and Exchange Commission.
“NYSE Euronext has always been committed to our shareholders, and board will consider the new proposal and do the right thing for our shareholders and other stakeholders,” he wrote. “In the meantime, we remain fully committed to our previously announced deal with Deutsche Boerse.”
Jeff Sprecher, ICE’s chief executive officer, has been involved in bidding wars before. His unsolicited bid for the Chicago Board of Trade in 2007 forced the Chicago Mercantile Exchange to raise its stock offer three times, eventually boosting it by 25 percent, from the original bid in October 2006 to July 2007 when shareholders approved the deal.
The Merc originally offered 0.3006 shares for each CBOT share, and ended with offering 0.375 shares. The value the Merc paid increased by about $3.2 billion to $11.2 billion from the originally offered $8 billion.
“The Board of Trade shareholders have to thank Jeff Sprecher and ICE for stepping in when they did, and to thank the many people who said they wouldn’t vote for the CME bid unless it was higher,” Nickolas Neubauer, a former chairman of the Board of Trade and a shareholder, said on the day the deal was approved.
The derivatives business of NYSE Euronext and Deutsche Boerse (DB1) alone would have been worth $24.7 billion, based on data compiled by Bloomberg during the February merger talks. That’s more than the companies’ combined capitalizations before the discussions were announced. By creating the world’s largest futures exchange controlling 40 percent of U.S. options, the new entity would have offset revenue declines in equities.
“This is a global battle with derivatives being the key factor,” said Donald Ross, the Cleveland-based global strategist for Titanium Asset Management Corp., which manages $9.5 billion. “The bidding war has just begun. Deutsche Boerse has to come back with something if they want play a role in this new world.”
NYSE Euronext has fallen 63 percent from a record peak of $108.96 in November 2006. Losses in market share and pricing spurred by competition in equities trading weighed on the price, according to Michael Wong, a Chicago-based analyst at Morningstar Inc.
“Besides volumes being under pressure from competitors, you also had pricing decreasing,” Wong said. “It was the loss of market share to trades going off of the exchanges and the newly anointed exchanges,” such as Bats Global Markets and Direct Edge Holdings LLC, that cut into profits.
Christopher Harris, an analyst at Wells Fargo & Co., wrote in a report yesterday that Deutsche Boerse could pay up to $48 a share for NYSE Euronext “before diluting the deal.” Deutsche Boerse may add cash to the offer instead of issuing shares that would lower its 60 percent stake in the combined company, according to Peter Lobravico, vice president of merger arbitrage trading and sales at Wall Street Access in New York.
“Putting cash in instead of bumping the ratio seems more likely,” Lobravico said. “That alternative would make sense because Deutsche Boerse’s share has come off and you’re more inclined to use your shares as currency when they’re trading at higher levels, not lower levels.”
Deutsche Boerse and NYSE Euronext’s share of futures trading would top the proportion at CME, according to exchange data compiled by Bloomberg. The merger would combine three of the nine U.S. options exchanges.
While CME may want to buy the European futures business of NYSE Euronext, that deal would hinge on whether it could get approval from European antitrust authorities, according to James Angel, a professor at Georgetown University in Washington. CME may want to bid to increase costs for competitors, similar to the way Greifeld may be trying to force Deutsche Boerse to raise its offer, he said.
“From a raw bidding perspective, if I were an NYSE shareholder, I would say, ‘Give me more,’” Angel said. “It looks like NYSE shareholders are going to get a better deal than they were a couple days ago. It’s a win-win situation.”
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