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D.Boerse, NYSE eye options as deal fails

Detail seen at the NYSE Euronext cash markets operations room in Paris
Detail seen at the NYSE Euronext cash markets operations room in Paris

By Foo Yun Chee and Luke Jeffs

BRUSSELS/LONDON (Reuters) - NYSE Euronext and Deutsche Boerse could try to put the disappointment of their failed $7.4 billion merger deal behind them by turning their attention to European exchange and clearing assets and a less ambitious growth path.

Deutshe Boerse and NYSE's proposal to create the world's largest exchange operator was rejected by European anti-trust authorities on Wednesday, making it the fourth to be blocked among a series of large exchanges deals struck in a frenzy of activity over the last year.

Now, the exchange operators need another way of facing the imperatives that led them to seek mergers in the first place: the need for scale and cost savings amid global competition.

NYSE Chief Executive Duncan Niederauer, in an interview last week in Davos, said the company had another strategy it had been pursuing even as it tried to close on the Deutsche Boerse deal.

"We have a standalone strategy that was our strategy before we engaged in this. We carried out a lot of elements of that in 2011," Niederauer told Reuters on Friday. "We will continue to be primarily focused on the derivatives and technologies businesses."

On Wednesday, NYSE said it plans to return $550 million to shareholders through a share repurchase program and to seek to grow its derivatives business.

NYSE and Deutsche Boerse have also been linked in media reports with the London Metal Exchange (LME), the metals market that has been put up for sale by shareholders.

A move on the LME would pitch them into a wide field thought to include the IntercontinentalExchange and CME Group from the United States, and the LSE and British broker

ICAP.

NYSE Euronext is also seen by analysts as an obvious rival bidder for European clearing house LCH.Clearnet, which has been in exclusive sales talks with the London Stock Exchange since September.

NYSE was in talks about a possible joint bid for LCH with data vendor Markit but the plan was scrapped in the middle part of last year.

"NYSE Euronext couldn't have been 100 percent focused on LCH with the Deutsche Boerse talks going on at the same time. In retrospect, it looks like they may have missed out on LCH," said Simmy Grewal, senior analyst at Aite Group.

But Richard Perrott, an analyst at Berenberg Bank, believes NYSE could look to rekindle that deal. He said: "Both exchanges will likely look at the LME and I suspect NYSE will see if they can resurrect their earlier talks with LCH Clearnet."

Steve Grob, head of Group strategy at trading system vendor Fidessa, said: "The rejection by the EC was not a surprise so they will have thought about their Plans B and C."

Deutsche Boerse and NYSE Euronext declined to comment on the possibility of bids for other assets.

END OF MEGA-DEALS?

Analysts said the regulatory veto on Wednesday might put a temporary brake on mergers.

"The motivation to do deals is as relevant as ever, with exchanges needing to scale up and seek cost synergies, but the failed deals over the past year will make investors and companies more cautious," said Perrott.

"But Deutsche Boerse/NYSE Euronext was an unusual deal in that there were obvious competition concerns that wouldn't exist with most other exchange combinations."

Nasdaq OMX Chief Executive Bob Greifeld said large deals are still feasible, but companies would need to take into account the regulator's analysis of the market.

"Now, when you look at this, any time you are trying to complete a merger where the number of competitors is low or the market share is high, your success will hinge on whether you can broaden the definition of the market," he told a conference call after Nasdaq posted better-than-expected quarterly earnings.

Among other failed deals were Nasdaq and IntercontinentalExchange's bid for NYSE Euronext which was rejected by the U.S. Department of Justice, London Stock Exchange's takeover of TMX Group was halted by shareholders of the Toronto Stock Exchange operator, and Singapore Exchange Ltd's bid for Australia's ASX Ltd was blocked by the Australian government.

EU regulators blocked the tie-up of Deutsche Boerse and NYSE Euronext to stop them taking a stranglehold on the European futures market.

The European Commission consulted more than 700 market participants and stakeholders during its assessment and said in a 459-page document on Wednesday that the combined entity would make it hard for new players to compete.

"The merger between Deutsche Boerse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide," EU Competition Commissioner Joaquin Almunia said in a statement.

"These markets are at the heart of the financial system, and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns."

Deutsche Boerse and NYSE Euronext had refused to sell either the German operator's Eurex derivatives market operator or the U.S. company's London-based futures exchange Liffe to address such concerns.

The failure will also cost the banks advising on the deal.

NYSE's bankers, which included Perella Weinberg Partners and BNP Paribas, stood to earn about $51 million in fees if the deal had closed, according to Freeman & Co estimates. Now they will likely make about 10 percent of that amount.

For Deutsche Boerse, bankers included Deutsche Bank and JPMorgan Chase, which will now likely earn 10 percent of the $48 million they stood to make if the deal had closed, Freeman said.

Deutsche Boerse shares closed up 3.4 percent, while NYSE Euronext shares closed down 0.5 percent.

(Additional reporting by Edward Taylor and Christoph Steitz in Frankfurt, John McCrank in New York, editing by Sebastian Moffett and Elaine Hardcastle)

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