Wall Street in the Desert?
Ramadan is usually a quiet month across the Middle East. Businesses close their doors in the early afternoon, commerce slows to a crawl, and with virtually everyone fasting until sundown, few people have much energy for globetrotting and dealmaking. So how to explain Soud Ba'alawy's brutal travel schedule in the past two weeks? Since Ramadan began on Sept. 13, he has been to New York, London, Milan, and Stockholm—missing Iftars, the traditional breaking of the fast every evening, back home in Dubai.
The reason: Ba'alawy is one of the key drivers of Dubai's effort to become a global financial hub. As executive chairman of Dubai Group—a big investment arm of the emirate's ruler, Mohammed bin Rashid al Maktoum—Ba'alawy was instrumental in forging a complex $6.5 billion deal involving Borse Dubai, NASDAQ, the Swedish exchange operator OMX Group, and the London Stock Exchange. The series of transactions would result in NASDAQ Stock Market Inc. (NDAQ) taking over the Swedish group, Borse Dubai holding a 20% stake in NASDAQ, and the U.S. exchange owning a third of a Borse Dubai subsidiary. On Sept. 26 the deal took a step closer to completion as investors owning 47% of OMX shares indicated their support. In a related transaction, Borse Dubai will take over a 28% stake NASDAQ holds in the LSE.
In a stroke, NASDAQ got an entrée into the booming Gulf region and a partner that may yet help it get its hands on the London bourse. OMX, which owns exchanges in Europe and—more important—has developed trading software used at 60 bourses around the world, got extra firepower in its efforts to sell that technology. And Dubai found a powerful ally to bolster its bid to become the regional money hub.
The transaction highlights the ambitions of Dubai and al Maktoum. With only modest oil resources, the sheikh has long nurtured non-energy industries such as shipping and high tech. And using both his own money and growing piles of debt, he has built a multibillion-dollar investment portfolio that includes top hotels such as New York's Essex House and London's Carlton Tower, extensive real estate holdings, and big stakes in international bank HSBC (HBC) and European planemaker EADS. Now he sees opportunity in creating a regional banking and trading hub, hoping to cash in on the trillions of dollars that have flowed to the Gulf in recent years. "If we develop a strong financial market, it will change the region," Ba'alawy says.
To make that happen, Sheikh Mohammed has assembled a team of top finance talent. Ba'alawy, 46, spent a decade at Citigroup (C), working his way up the ranks in risk management until finally taking over as treasurer for the bank's operations in the Gulf region. Now, Ba'alawy has 130 people in five countries scouting for investments around the world. His chief executive at Dubai Group, Thomas S. Volpe, is a former head of San Francisco-based investment bank Hambrecht & Quist Inc. And Per E. Larsson, the former boss of OMX' predecessor, is now chief of Borse Dubai. "Sheikh Mohammed's main concern is making sure this city competes quickly with New York," says Mohamed Ali Alabbar, chairman of developer Emaar Properties and a close adviser to al Maktoum.
The sheikh isn't alone among Gulf rulers in recognizing the potential in financial markets. Some 250 miles to the west in Doha, Qatar, Sheikh Hamad bin Khalifa Al-Thani has adopted a similar strategy, earmarking some $40 billion for projects that might reduce the emirate's dependence on oil and gas. Giving Dubai a poke in the eye, Qatar in 2005 hired as its chief financial regulator Phillip Thorpe, who had been fired from a similar job in Dubai after a flap over dealmaking by local officials. The Qataris were interested in NASDAQ's stake in the LSE, and industry insiders say they were furious when Borse Dubai and NASDAQ got together. Qatar quickly responded by purchasing 20% of the LSE and 10% of OMX.
Qatar officials declined to comment, but their bid for OMX forced Borse Dubai to raise its offer by some $700 million.
SHEIKH'S MANDATEStill, Dubai has the upper hand in the competition. Just about every major bank on earth has set up shop in or near the polished stone complex called the Dubai International Financial Center, aiming for work on mergers and acquisitions, Islamic finance, and lending for projects ranging from oil refineries to luxury hotels. Qatar's financial industry, by contrast, is largely focused on the local market, though it will likely get a boost from growing cooperation with the LSE. "I think I'm the only investment banker in Doha," quips Kapil Chadda, head of investment banking for HSBC in Qatar.
Central to Dubai's efforts are Ba'alawy and Essa Kazim, a 44-year-old with an M.A. in economics from the University of Iowa. In August the sheikh merged the successful local exchange with the two-year-old Dubai International Financial Exchange (DIFX), a bourse with British-style regulation aimed at international investors that has been something of a flop. Al Maktoum named Ba'alawy vice-chairman and Kazim chairman of the merged company, Borse Dubai. And he gave them a mandate to cut deals that would boost the emirate's profile in global finance. Ba'alawy is the strategist and diplomat, close to Mohamed al Gergawi, the ruler's right-hand man, and on good terms with outside players such as LSE boss Clara Furse. Kazim, on the other hand, has won wide respect for his work in building the local bourse into a big moneymaker.
Ba'alawy and Kazim quickly singled out OMX. So last spring the Dubai moneymen offered to buy 30% of the Swedish outfit but were brushed off. When NASDAQ on May 25 announced a $3.7 billion offer for OMX, Borse Dubai countered with its own bid of $4 billion. With the help of bankers at JPMorgan Chase & Co. (JPM) and HSBC (which is providing nearly all the financing for the deal), the two teams kicked off a series of meetings in London and New York. NASDAQ CEO Bob Greifeld—who will also become vice-chairman of the DIFX—says he was reassured by the Dubai executives' "organized and methodical" approach. He decided that the two groups didn't need to be adversaries. NASDAQ saw OMX as a way to expand into northern Europe, while Dubai wanted OMX's technology to use in emerging markets, especially around the Gulf. "We went after OMX," Kazim says, "and we wound up with a better brand."