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Will NYSE Tussle Turn NASD?

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Keeping abreast of the to’ing and fro’ing between the various entities vying for control of NYSE Euronext has added a certain piquancy to simultaneously hosting a panel discussion on Optimising Latency in a Fragmented World at our Business & Technology of Low Latency Trading events this month in London and New York. Assessing the connectivity implications of the current wave of exchange consolidation is a juggling act if ever there was one.

Now, we are no purveyors of crystal balls, and we have no idea how the battle to own NYSE Euronext will turn out, but what’s becoming clear to us is that the apparently unwanted bid from Nasdaq OMX and InterContinental Exchange ain’t going away anytime soon. What’s more, Nasdaq and ICE are adding to said piquancy with their increasingly terse, and frequent, broadcasts exhorting NYSE Euronext shareholders to reject Deutsche Boerse’s offer in favour of their own.

This merry-go-round kicked off shortly after midday London time on April 1 (timing is everything), when Nasdaq/ICE launched their offer for NYSE Euronext, which promised a 15%, or $1.4 billion, premium over Deutsche Boerse’s February proposal. Nasdaq/ICE are offering $42.69 per NYX share, compared with Deutsche Boerse’s $37.26 per NYX share.

NYSE/Deutsche Boerse’s initial response to Nasdaq/ICE was outright rejection. The original NYSE/Deutsche Boerse arrangement held the promise of some €300 million in cost synergies, principally from economies of scale in information technology, clearing operations, market operations and corporate centre function, and that seemed to be sufficient when combined with the upside: geographic compatibility and the prospect of global dominance in derivatives trading.

But Nasdaq/ICE were having none of it. On April 21, they issued a statement describing their own bid as offering “superior value” and calling on NYSE Euronext’s board to at least meet to hear details of their plans, apparently permitted under NYSE Euronext’s rules of engagement with Deutsche Boerse. Further, it pointed out that “the $350 million reverse termination fee that Nasdaq OMX and ICE have offered for failure to obtain antitrust approvals evidences their commitment to and confidence in the proposal. In sharp contrast, the Deutsche Boerse transaction offers no reverse break-up fee for antitrust, despite the admission by NYSE Euronext’s CEO that the Deutsche Boerse transaction faces regulatory challenges.”

So, a slight lean on the NYSE Euronext board.

Rejected yet again after NYSE Euronext and Deutsche Boerse found a further slab of economies from their proposed plan, Nasdaq/ICE had this to say on April 25:

“NYSE Euronext investors should be highly skeptical that after two years of exploratory merger discussions, including more than six months dedicated to finalizing the transaction, NYSE Euronext has suddenly found a reported €100 million in additional synergies. This increase appears not to be a matter of sharpening a pencil, but an unexplained shift in strategy. The discovery that  initial synergies having been understated by one-third comes after receiving a superior proposal from Nasdaq OMX and ICE that achieves greater synergies.”

Nasdaq/ICE went further. “NYSE Euronext should describe these newly found synergies in detail in order to support the credibility of these revised estimates,” they said, “particularly in light of commitments to retain two technology platforms and two headquarters.”

And therein lies our panel session juggling act. We’ve been speculating, live and onstage, how the takeover of NYSE Euronext will impact those poor hedge funds and prop shops who need to collocate with all the markets concerned. It’s a complex situation, as we’ve discussed in these pages. And this ongoing lack of finality is forcing hedge funds to, well, hedge.

In our presentations we like to speculate on the new venue names we might expect to see in the event of either outcome (we haven’t thought about the possibility of some unknown third bid, but you never know). After some deliberation, we feel that a combined Deutsche Boerse/NYSE Euronext should be called the S Exchange.

Here’s our rationale: notwithstanding potential Deutsche Boerse protestations, we still believe the combined group’s markets would levitate to its new Liquidity Centres, the most important European one located in Basildon, Essex, east of London. Meanwhile, Deutsche Boerse already owns and operates the International Securities Exchange (ISE) in the US. Drop the ‘International’ and you’re left with The Securities Exchange, handily abbreviated for the group moniker to the S Exchange, in homage to the key European data centre in lovely Essex.

A Nasdaq/ICE win, meanwhile, would yield the simple but honest New Jersey Stock Exchange, as Nasdaq shifted operations from its Carteret, NJ, shared hosting facility to NYSE’s Mahwah, NJ, dedicated site. ICE would doubtless be along for the ride.

More seriously, these scenarios point to a more fundamental difference between the two proposals on the table. To us, the Deutsche Boerse appears the more optimistic, growth-based play, with less geographical overlap and more scope for complementary activities, if less for direct cost savings. The Nasdaq/ICE deal, meanwhile, seems like a pure cost play. Lots of overlap, lots of potential for cuts, cuts, cuts.

The remaining question is whether NYSE Euronext’s shareholders see their glasses as half full or half empty.

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