Late last week, the board of directors for NYSE Euronext (NYX) unanimously reaffirmed its merger agreement with Deutsche Boerse (DB1) and rejected the proposed merger agreement by Nasdaq OMX Group (NADQ) and IntercontinentalExchange (ICE). The key points that NYSE Euronext hit upon were that the Nasdaq-IntercontinentalExchange deal would create less long-term value for shareholders, is less likely to close, would burden the combined company with high levels of debt, destroys human capital, would be a strategic mistake in terms of where global markets are headed, and has too much execution risk. We don't anticipate any material change in our fair value estimate for NYSE Euronext, Deutsche Boerse, Nasdaq OMX, or IntercontinentalExchange following this announcement.
It's our opinion that neither merger agreement is without risks. The major antitrust concern with Deutsche Boerse involves its market share in European exchange traded derivatives. We still hold that market share concentration for derivatives exchanges is natural due to a developed liquidity pool that lowers transaction costs such as bid-ask spreads and slippage. Additionally, there are other methods in Europe to execute derivative transactions such as using over-the-counter products or trading on smaller derivative exchanges. That said, it's not certain that regulators would not block the merger on antitrust concerns. Additionally, regulators could require stipulations, such as business divestitures or breaking the vertical integration between derivative exchanges and their clearinghouse, that would make the merger unpalatable to NYSE Euronext and Deutsche Boerse.
There could be antitrust concerns from the listings, trading, and even data side of a Nasdaq-NYSE merger. Listings would be consolidated in the United States if a Nasdaq-NYSE merger were to go through, but it's quite common internationally for countries to have only one listing venue. A new competitor, BATS, is also planning to offer listing services in the US by the end of 2011. The combined NYSE/Nasdaq would have the leading market share in equities and options trading, but the US trading landscape is probably the most competitive in the world and would likely remain so even after the merger.
When looking at exchange data products, it's important to realise that some are already regulated while others are mainly proprietary. The Consolidated Tape Association and Options Price Reporting Authority handle much of the market information for equities and options trading in the US and allocate data revenue based on market share. A merged company would have the combined revenue allocation of the individual companies but wouldn't have any more material ability to influence policies at the consolidated data organisations. Monopolistic concerns in regard to other exchange data products would have to take into account that they are proprietary developments of the exchanges and likely subsidize trade execution fees.
Both of the potential NYSE Euronext mergers come with risks. They could be blocked by regulators, as the Singapore and Australian exchange merger was recently. Additionally, they are risky from an execution standpoint, as value creation for shareholders would be predicated on nearly perfect operational integration to realise synergies.
