Yesterday, Reuters reported that NYSE Euronext Inc.’s (NYX) proposed merger with Frankfurt-based Deutsche Boerse has been enveloped by a new snag as the European Union Commission (EUC) has put forth a statement of objection on the deal.
The objection primarily includes EUC’s decision to exclude the review of over-the-counter (OTC) derivatives, thereby raising concerns over the successful and timely completion of the merger.
The EUC that began its multi-phase intense review early this year has now clarified that it would identify exchange-listed derivatives market as the pertinent product market and not the OTC derivatives.
The EUC fears that the merger provides ample scope for a monopolistic model in future, primarily with the fusion of NYSE Liffe and Deutsche Boerse’s Eurex derivative markets. Hence, the EUC had already made it very clear in March this year that the deal could undergo a delay on grounds of regulatory impediments arising out of extensive reviewing.
However, both NYSE and Deutsche Boerse are trying to explain the difference in their operations, related to both the product and geographic scopes that primarily define the law of competition in any industry. The parties-to-merger have claimed that majority of their derivative markets are traded as part of the OTC market and not through an exchange, thereby leaving ample room for healthy competition in the European markets.
Moreover, the merger parties have also made a counter-explanation regarding the EUC concern over the loss of competition in the derivative market from the proposed merger.
The parties have reasoned that both NYSE’s Liffe and Deutsche Boerse’s Eurex offer different interest rate futures products and that both the parties-to-merger compete with off-exchange market. Hence, the merger would not harm the competition dynamics in the European markets.
Meanwhile, the EUC antitrust commission is deeply probing into the matter and expects to come out with a viable solution that could include clearing an operation or setting conditions such as the selling of some assets, in order to mitigate competition concerns. However, any stringency can have serious negative implications on the deal.
With respect to this, however, the EUC could allow the smooth advancement of the merger as the latter intends to propose the financial reforms next month, which may provide new rules for clearing, indexes and data. These efforts could give way to a fresh blow of competition for the combined group as well as the whole market.
On the flip side, a blockage of the deal is also possible, if the companies involved do not commit to solve these concerns, although such a scenario is an unusual one. EUC is expected to give out its report-card by December 13, 2011.
Solid Stock Exchange Ever
The NYSE-Deutsche merger is expected to be the most solid business combination in the history of the global stock exchanges. Based on 2010 net revenues, the prospective merger will earn approximately 37% of total revenue from derivatives trading & clearing, 29% in cash listings, trading & clearing, 20% in settlement & custody and 14% in market data, index & technology services.
Moreover, the prospective merger is expected to generate full run-rate cost synergies of €400 million ($580 million) along with €150 million ($218 million) in revenue synergies.
Industry Moves
While a roar of merger and acquisition activities were witnessed in the past three quarters, most of them never saw light due to the regulatory snags, echoing the paramount importance of the regulatory processes. The London Stock Exchange failed to take over Canada’s TMX Group and Singapore stock exchange was also unable to acquire Australian stock exchange owing to opposition from regulatory authorities in both the countries. Even NASDAQ OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc.’s (ICE) premium-priced joint takeover bid was repeatedly rejected by NYSE on multiple antitrust issues.
However, the NYSE-Deutsche merger has been strategically and successfully crossing hurdles in the US and Germany since February this year, ever since it got into an approximate $9 billion deal. Another merger that appears to have survived is the one between BATS Global Markets Inc. and Chi-X Europe. This is soon expected to merge in a deal that will bring in a significant new competitor in European equities trading.
INTERCONTINENTL (ICE): Free Stock Analysis Report
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NYSE EURONEXT (NYX): Free Stock Analysis Report
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