The Battle for Sweden's OMX

Has Borse Dubai's breach of takeover rules ruined its bid for the Swedish exchangeand boosted the prospects for NASDAQ?

Dubai's effort to break up the agreed takeover of Swedish stock exchange operator OMX Group (OMX.ST) by NASDAQ (NDAQ) suffered a severe blow Aug. 23. Sweden's Financial Supervisory Authority ruled that Borse Dubai, a government-owned holding company, "breached the law" when it issued a press release Aug. 9 announcing that it was in the process of buying OMX shares.

The regulator says the press release amounted to a takeover offer and that Borse Dubai, which was advised by HSBC (HBC), should have informed the Swedish authorities that it was making such a move. The regulator decided against taking any punitive action.

The ruling is clearly a plus for NASDAQ, whose cash and share offer, valued at $3.7 billion, was accepted by OMX on May 25. Whether it is a knockout blow for Borse Dubai's brash gambit remains to be seen. Borse Dubai put a brave face on the ruling, saying, "We look forward to continuing to work with [the regulator] as our offer for the OMX progresses."

OMX a Respected Player

Still, there is widespread speculation among OMX shareholders that the regulator may now be reluctant to approve Borse Dubai as a "fit and proper" owner for the stock exchange. To acquire more than 10% of OMX shares requires the regulator's seal of approval. Borse Dubai tabled an all-cash $4 billion offer Aug. 17 and says it has bought 4.9% of OMX's shares and locked up another 23.5% through options contracts.

It is easy to understand why both NASDAQ and Borse Dubai are interested in OMX. Though relatively small in financial terms, with operating profits of $180 million on revenues of $538 million in 2006, OMX is a respected player among stock exchanges. It owns or operates most of the bourses in the Nordic and Baltic area, reaching about 80% of the region via its Nordic Exchange.

OMX also distributes its highly regarded trading technology to some 60 exchanges in 50 countries, making it easily the most global of players in the exchange world. And it's a strong contender in derivatives—a market growing much faster than cash equities, despite recent hiccups.

A Rich New Channel for NASDAQ

NASDAQ came to see OMX as a kind of consolation prize after an unsuccessful battle to win the London Stock Exchange. (NASDAQ said Aug. 20 that it was reviewing ways of divesting the 31% stake in the LSE that it acquired during the takeover bid.) But while OMX lacks the LSE's position in the biggest financial center outside the U.S., its global footprint has attractions that the LSE lacks.

For one thing, OMX brings to the table listings for premier companies such as Finnish mobile-phone giant Nokia (NOK) and Swedish telecom-equipment giant Ericsson (ERIC). Its advanced technology also will open doors to other exchanges for the merged company. And the combination will provide NASDAQ a rich new channel not just for trading financial products but also such emerging services as disclosure and board recruiting.

OMX also can aid NASDAQ's Asia ambitions through its strong ties to the Singapore and Hong Kong exchanges. NASDAQ plans to make OMX Chief Executive Officer Magnus Böcker its president while Robert Greifeld will retain his CEO title. NASDAQ also expects to adopt OMX's global architecture.

Major Attractions for Dubai

The attractions of OMX are well known to Per Larsson, Böcker's predecessor, who is now chief of the Dubai International Financial Exchange (DIFX), the emirate's struggling candidate to establish a global trading market. Landing OMX would give Dubai a big shot of the financial-market credibility it craves. Dubai's exchange executives also would be able to use OMX's technology and its personnel to consolidate the region's fast-growing bourses.

As part of its effort to become the Persian Gulf region's business hub and financial center, Dubai launched the DIFX in 2005. The Dubai establishment hoped that the DIFX, with its international-style regulation, would attract regional and international listings. But establishing a global exchange in Dubai has turned out to be a lot tougher than was expected by some of the emirate's leaders.

Dubai has been very successful at persuading global banks such as Morgan Stanley (MS) and Credit Suisse (CS) to locate teams of bankers in the emirate, but DIFX has been a disappointment so far. The exchange has attracted only two primary listings, Kingdom Hotel Investments (KHIQ) and Al Baraka Banking Group (BARKA). Trading volume has only been about 2,500,000 shares so far this year—roughly what NASDAQ does in 90 minutes.

The DIFX was a "brilliant idea, but it was not realized that when it comes to capital markets you can't build a [stock exchange] overnight," says Ghassan Medawar, a former DIFX executive, who is now a partner at Full Circle Investments, a Dubai-based investment firm.

An Ill-Considered Bid

To add heft to the DIFX, the Dubai government recently announced that it would combine the struggling international exchange with the Dubai Financial Market, a much more active domestic market, under a newly created holding company called Borse Dubai. It is this entity that is spearheading the move on OMX.

But Dubai's approach to OMX puzzles many observers. For a government-owned company such as Borse Dubai to make what is essentially a hostile bid for a sensitive asset such as a financial exchange seems ill-considered. People close to the situation say the Dubai side made little effort to win over key Swedish players such as OMX executives. "The intentions are good, but there was naîveté and inexperience," says a Dubai-based banker. "You can't just assume people will take your check."

What might be logical is for the three companies—NASDAQ, OMX, and Borse Dubai—to work together. But a person close to the situation says Borse Dubai is reluctant to become involved with a U.S. company given the brouhaha in 2006 over the attempted acquisition by port operator Dubai Ports World of several U.S. ports. Instead, says a Borse Dubai spokesman, "Our focus now is on the offer on the table."