EU leaning to block NYSE-Deutsche Boerse merger
Published: Tuesday, January 10, 2012 at 11:36 p.m.
Last Modified: Tuesday, January 10, 2012 at 11:36 p.m.
BRUSSELS — European regulators will push to block the planned $10 billion merger of the New York Stock Exchange and its German counterpart, two people close to the merger said.
Antitrust regulators fear that the combined company, which would be the largest operator of stock exchanges in the world, would unfairly dominate trading of financial tools called derivatives in Europe, one of the people said Tuesday.
The European Union's competition commissioner, Joaquin Almunia, is set to recommend blocking the deal, between NYSE Euronext and Deutsche Boerse, at a meeting with fellow commissioners Feb. 1, this person said.
The second person said Tuesday that it appeared the European Commission, the executive arm of the EU, was "working toward a prohibition." Both people spoke on condition of anonymity because the process is confidential.
The negative opinion of the regulatory team working on the deal will probably set off several weeks of intense lobbying, with the two companies trying to persuade other commissioners to support the merger.
NYSE Euronext and Deutsche Boerse say the merger would strengthen mainland Europe as a financial center and cut costs for banks and other financial firms that would use the combined exchange.
Opponents of the deal, such as the Nasdaq OMX market and the parent company of the London Stock Exchange, will seek to convince commissioners that it could destroy other companies trying to move into derivatives trading.
Derivatives are complex financial products that allow investors to place bets on bet on interest rates, stock indexes or commodity prices — or even nontraditional variables like the weather.
The two exchanges are believed to control more than 90 percent of the trading of some of the most popular derivatives products in Europe.
To stop the deal, a majority of the EU's 27 commissioners must vote to block the deal. A final decision must come by Feb. 9. It is rare for recommendations from the competition commissioner to be overturned.
European antitrust regulators have examined the planned merger since last early summer. Their concerns have crystallized around the two companies' strong derivative trading operations, NYSE's Liffe and Deutsche Boerse's Eurex.
The commission has asked that the companies sell one of the two platforms, the first person said — a demand that the two companies rejected.
NYSE and Deutsche Boerse argue that the commission should take into account that the vast majority of derivative trades don't happen on regulated exchanges but directly between banks and other financial firms.
They also argue that the commission should not only focus on Europe, but see derivative trading as a global market.
NYSE and Deutsche Boerse said in a statement that they had not yet received a decision from the commission. A spokeswoman for Almunia also said there had been no final decision on the merger.
NYSE Euronext stock climbed $1.22, or 4.6 percent, at $27.79. Richard Repetto, an analyst at Sandler O'Neill, said the stock would be worth $25.38 if the merger took place today, but he said NYSE Euronext by itself is worth $29 to $30 per share.
The New York exchange, with its famed Corinthian columns at the corner of Wall and Broad streets in Manhattan, dates to 1792, when 24 brokers and merchants gathered to trade stocks under a buttonwood tree on Wall Street.
But its trading floor is relatively empty these days, save as a backdrop for TV coverage. So is the floor of Deutsche Boerse's exchange in Frankfurt. Most trading now takes place on computers that can match thousands of orders a second.
"The average investor isn't going to see any difference whether the deal goes through or not unless they happen to own shares in either company," said Justin Schack, managing director for market structure analysis at Rosenblatt Securities.
The exchanges would probably keep looking for partners if the deal were scuttled because that is where the industry is heading, said Kenneth Marlin, a managing partner at Marlin & Associates, a boutique investment bank.
"Everybody wants to be a Ford or a Toyota," he said. "No one wants to be Studebaker."
But Schack said he doubts another buyer for NYSE would step up to replace Deutsche Boerse. Other exchange operators would likely run into the same problems with antitrust authorities, he said.
The past year was strewn with failed deals. The Nasdaq and the IntercontinentalExchange withdrew a competing $11 billion bid for the NYSE last May after the Justice Department said it would block the deal. A deal between the London Stock Exchange and the group that operates the Toronto Stock Exchange failed in part because of regulatory concerns.
The Justice Department said last month that it would allow the deal between NYSE Euronext and Deutsche Boerse to go through if the German company sold its stake in Direct Edge Holdings, the fourth-largest exchange operator in the United States.
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