New M&A Could Emerge on the Exchange Market

We expect to hear of other deals now that Nasdaq OMX and IntercontinentalExchange are free to pursue other strategic mergers and acquisitions

Michael Wong, CPA 19 May, 2011 | 12:14PM
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Nasdaq OMX Group (NDAQ) and IntercontinentalExchange (ICE) announced they are withdrawing their offer to acquire NYSE Euronext (NYX) earlier this week. This announcement follows discussions with the US Department of Justice that found serious anticompetitive concerns in regard to stock listings, opening and closing stock auctions, off-exchange trade reporting, and data products. We don't anticipate any material changes in our fair value estimates for any of the exchanges in our coverage universe.

The withdrawal of the proposal makes the decision process for NYSE Euronext shareholders easier, as NYSE Euronext shareholders don't have to weigh the relative merits of being acquired by Nasdaq OMX and IntercontinentalExchange over merging with Deutsche Boerse (DB1). Shareholders now just have to weigh whether they believe NYSE Euronext is more valuable as a stand-alone entity or as part of the global exchange behemoth that potentially will be Deutsche Boerse-NYSE Euronext. Deutsche Boerse shareholders also can be more reassured as to the terms of the merger and that the deal price for NYSE Euronext won't be increased. That said, regardless of what NYSE Euronext and Deutsche Boerse shareholders eventually vote upon, European antitrust concerns over the combined company's dominance of exchange-traded derivatives has to be resolved.

We continue to believe that Nasdaq OMX's and IntercontinentalExchange's competitive positions are still relatively stable without a merger with NYSE Euronext. The only asset that Deutsche Boerse adds to NYSE Euronext's portfolio is its ISE options exchange business. Combining their US options market share and unifying their strategies isn't a game-changer for the US trade execution landscape. We also believe that the combined portfolio of Deutsche Boerse's and NYSE Euronext's European assets don't pose a material threat to Nasdaq OMX's Nordic and Baltic exchange businesses. The part of IntercontinentalExchange's portfolio that is concentrated in globally relevant commodities, such as energy and agricultural products, is as strong as it has ever been. That said, acquiring NYSE Euronext's futures business would have brought welcome diversification into more financial orientated products such as interest rates and equity indexes.

Now that Nasdaq OMX and IntercontinentalExchange are free to pursue other strategic mergers and acquisitions, we expect other deals could be announced in the following quarters. We always have believed that Nasdaq OMX is a prime merger partner due to its reasonably sized market capitalisation (in respect to other global exchange groups) and its ability to give instant geographic exposure to the deep capital markets of the US and Europe, along with asset-class exposures to both cash equities and derivatives. IntercontinentalExchange is in one of the most desired areas for exchanges--commodity futures--giving it a solid base from which to acquire another company or be merged into a larger exchange group. An unsolicited bid for TMX Group (X) by a consortium of Canadian banks and pension funds could break apart the TMX Group and LSE Group (LSE) merger and put both of those exchanges back into play. Additionally, CBOE Holdings (CBOE), with its relatively small market cap and exclusive or propriety products, and BATS Global Markets, which just filed to IPO, could also be prime merger targets.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
London Stock Exchange Group PLC11,100.00 GBX0.82Rating

About Author

Michael Wong, CPA  Michael Wong is a stock analyst at Morningstar.

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