Nasdaq Talks With Carlyle Signal Exchange Takeovers Not Over

Nasdaq OMX Group Inc.’s talks with Carlyle Group LP about taking the company private are spurring speculation among investors and analysts that a $50 billion wave of attempted exchange deals in the past three years isn’t over.

The discussions between Nasdaq, the second-largest owner of U.S. exchanges, and Carlyle broke down over price, according to a person with direct knowledge of the matter. The company trades at the second-cheapest multiple relative to earnings among 25 exchanges after U.S. equity trading volume dropped for a third year, according to data compiled by Bloomberg.

Exchange companies have been the subject of takeover bids amid shrinking profits for securities trading, leading to IntercontinentalExchange Inc.’s offer for the NYSE Euronext last month and Hong Kong Exchanges and Clearing Ltd.’s purchase of the London Metal Exchange. Nasdaq Chief Executive Officer Robert Greifeld has been re-organizing business units and reducing expenses after the company’s U.S. cash equity trading revenue fell 21 percent last year.

“You can see the momentum building up again,” Sang Lee, managing partner at Aite Group LLC in Boston, said in a telephone interview. “It’s about firms trying to diversify their revenue and firms trying to expand their global footprint. It’s tough for a public company to set out long-term goals and try to meet those goals without getting hammered every quarter.”

Share Gains

Nasdaq shares rose 3.1 percent to a four-year high yesterday, and advanced 0.6 percent to $30.55 today. The shares have soared 22 percent this year. NYSE Euronext is up 52 percent since announcing its deal with IntercontinentalExchange in December. The Bloomberg World Exchanges Index has rallied 11 percent this year, compared with a 6.5 percent gain for the Standard & Poor’s 500 Index.

The talks were initiated by Carlyle Chief Financial Officer Adena Friedman, who left Nasdaq in 2011 as chief financial officer and head of corporate strategy, said the person, who asked not to be identified because the meetings were private.

Rob Madden, a spokesman for Nasdaq OMX, declined to comment, saying the company doesn’t speak about “rumors or speculation.” Carlyle’s spokesman Randy Whitestone also declined to comment.

“Carlyle was looking for an opportunity to make money and Nasdaq wanted to boost their valuation,” Matthew Heinz, a St. Louis, Missouri-based exchange analyst at Stifel Nicolaus & Co., said in a telephone interview. He recommends buying the shares. “They’ve been frustrated with their valuation for a long time.”

Stock Valuation

Nasdaq has been trading at an average 10.6 times reported earnings since 2009, compared with 18.8 for the Bloomberg World Exchanges Index. Nasdaq’s multiple was at 12.2 yesterday, the second-lowest of the 25-member index, behind London Stock Exchange Group Plc’s 6.5, data compiled by Bloomberg show.

Nasdaq had a 21 percent decline in full-year net U.S. cash equity trading revenue to $122 million last year, the company said on Jan. 31. NYSE, the biggest operator of U.S. exchange, said its cash trading and listings net revenue showed a 12 percent drop over the same period.

Average daily volume for stocks listed on U.S. exchanges has declined every year since 2009, falling 18 percent in 2012 to a low of 6.42 billion shares, according to data compiled by Bloomberg. That compares with 9.77 billion in 2009 and 6.36 billion so far in 2013.

NYSE Euronext announced in December it agreed to be bought by IntercontinentalExchange in an $8.2 billion cash and stock deal, set to close later this year. The company chose the deal with the 12-year-old energy and commodity futures bourse over an offer from Warren Buffett’s Berkshire Hathaway Inc. in November.

Deals Blocked

When NYSE was planning to merge with Deutsche Boerse AG in Frankfurt in 2011, Nasdaq and IntercontinentalExchange made a joint hostile bid for the U.S. exchange in an attempt to derail the deal. The Deutsche Boerse deal was rejected by European competition authorities in February 2012, while the Nasdaq-IntercontinentalExchange bid was blocked in the U.S. on concern the combination would dominate American stock listings.

Changing from a public company to a closely-held firm may also be awkward for an exchange operator such as Nasdaq, according to Jillian Miller, an Atlanta-based exchange analyst at BMO Capital Markets.

“Taking an exchange business private is a bit tricky because as a listing venue Nasdaq is in the business of promoting the IPO process,” Miller, who rates the shares at market perform, wrote in an e-mail yesterday. “It might send an odd message to Nasdaq-listed companies.”

Company History

Nasdaq began trading 2,500 over-the-counter securities as the National Association of Securities Dealers Automated Quotations in 1971, according to the company’s website. It has been the favored venue for the biggest U.S. technology companies, listing Google Inc., Intel Corp. and Apple Inc. and more recently Facebook Inc. last year.

Nasdaq’s own shares debuted in 2002. The exchange is expanding into derivatives, setting up a new London-based market and buying a 25 percent stake in a Dutch alternative trading system focused on stocks and equity derivatives.

“Why Nasdaq sells is because it creates shareholder value,” Rich Repetto, an exchange analyst at Sandler O’Neill & Partners LP in New York, said in a phone interview. “If they could sell it at $35 or $40, I think they’d be pretty happy,” he said. “If they can sell and create more value than what they think they can by just operating organically, then it’s the board’s duty to look at those options.”

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