Deutsche Boerse AG, operator of the Eurex futures platform and Frankfurt Stock Exchange, agreed to buy New York Stock Exchange parent NYSE Euronext in a deal that creates the world’s largest owner of equities and derivatives markets.
Deutsche Boerse will swap one share of its own stock for one share in the new company, while every NYSE Euronext share will be exchanged for 0.47 share, according to a statement today. Deutsche Boerse will control 60 percent of the new corporation. Reto Francioni, the chief executive officer of Frankfurt-based Deutsche Boerse, will serve as chairman. Duncan Niederauer, CEO of New York-based NYSE Euronext, will keep that title at the combined organization.
While the merged entity will list corporations with about $15 trillion in value, more than any other exchange, what may prove more lucrative is ownership of growing venues for trading futures and options, said Rich Repetto, an analyst at Sandler O’Neill & Partners LP. The union follows Singapore Exchange Ltd.’s October bid for ASX Ltd., which runs the Australian stock market, and London Stock Exchange Group Plc’s agreement last week to buy Canada’s TMX Group Inc.
The Deutsche Boerse-NYSE deal “makes sense because there has been a tremendous amount of growth in the derivatives area,” Keith Wirtz, who helps oversee $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, including NYSE Euronext shares, said yesterday. “It’s not the first and won’t be the last deal in that industry.”
Board of Directors
Deutsche Boerse will get 10 of 17 seats on the combined company’s board, according to today’s statement.
NYSE Euronext said last week that derivatives revenue climbed 14 percent in 2010, while cash equities fell 10 percent. By 2013, NYSE Euronext may generate more than 50 percent of its earnings from options and futures, according to Ed Ditmire, an analyst at Macquarie Group Ltd. in New York, who has an “outperform” rating on the stock.
Derivatives are financial instruments used to hedge risks or speculate. They can be based on an underlying asset such as stocks, bonds, currencies or commodities, or linked to specific events like changes in interest rates.
NYSE Euronext is the largest U.S. equities exchange operator with 26 percent of volume last month, according to data compiled by London-based Barclays Plc. In Europe, the combined company’s share of stock trading was more than 27 percent over the past five days, beating London Stock Exchange Group’s 25 percent across its venues, according to data compiled by Bats Global Markets, an exchange operator in Kansas City, Missouri.
Equal to CME
Combined, the companies will manage futures exchanges whose volume is about the same as those owned by Chicago-based CME Group Inc. NYSE Liffe, NYSE Liffe US, Eurex and five NYSE Euronext markets that trade futures and options together executed about 3.1 billion contracts last year, the same as CME’s three futures exchanges, according to data from the Futures Industry Association, a Washington-based trade group representing Wall Street banks. The data exclude trading in U.S. options markets, which don’t handle futures.
“On the derivatives side, clearly the CME is a big incumbent and being able to compete on scale in the derivatives landscape helps us,” Joseph Mecane, co-head of U.S. listings and cash execution at NYSE Euronext, said in an interview with reporters on Feb. 10.
The merged company will also combine three of the nine U.S. options exchanges to surpass CBOE Holdings Inc. as the nation’s biggest operator. The International Securities Exchange is owned by Eurex, which is controlled equally by Deutsche Boerse and SIX Swiss Exchange Ltd., while NYSE Euronext operates NYSE Amex Options and NYSE Arca Options. The three markets handled 43 percent of U.S. options trades last year, compared with CBOE’s 29 percent, according to Options Clearing Corp. data.
Derivatives are so valuable that Deutsche Boerse may get a stock trading business for free. NYSE Euronext generates at least half its net income from trading options and futures contracts, according to Macquarie. That portion of earnings will reach $462 million by 2013, based on analyst estimates compiled by Bloomberg. Add Deutsche Boerse’s projected profit from its Eurex unit and the combined entity will earn $1.18 billion from derivatives in the U.S. and Europe within three years.
The derivatives business of NYSE Euronext and Deutsche Boerse alone would then be worth about $25 billion, based on the average valuation for options and futures exchanges, more than the companies’ combined capitalizations before the talks were announced this week.
The deal “reflects the globalization of trading, and will be a formidable force in a number of asset classes,” Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion, said yesterday. “It might end up sailing right through, but there are potential issues from a regulatory standpoint in lots of different areas and jurisdictions.”
The U.S. Department of Justice and Securities and Exchange Commission will have to sign off on the transaction.
“There’s nothing insuperable that will stand in the way for the SEC to approve this deal,” said Robert Colby, who left the SEC in 2009 after 28 years at the agency. He helped transform U.S. equities trading from a dealer-driven market to a series of electronic venues that provide investors with faster and cheaper executions. “They cleared the same hurdles when Eurex bought ISE,” said Colby, now a partner at law firm Davis Polk & Wardwell LLP.
Almost $100 Billion
Deutsche Boerse’s Eurex bought New York-based International Securities Exchange Holdings Inc., an options market, in 2007. Exchanges have completed almost $100 billion of mergers since January 2000, according to data compiled by Bloomberg. NYSE combined with Euronext NV in 2007. TMX bought Montreal Exchange Inc. in 2008, a year after London Stock Exchange Group purchased Borsa Italiana SpA. IntercontinentalExchange Inc. acquired the New York Board of Trade in 2007.
Four years after losing to the New York Stock Exchange in the takeover of Euronext, Deutsche Boerse’s Francioni, 55, is buying both companies and putting his rival’s chief executive officer in charge.
While Francioni is known for cutting costs by shifting jobs to Prague from Frankfurt and moving to cheaper headquarters, Niederauer, 51, built his reputation running Goldman Sachs Group Inc.’s specialist operation on the floor of the NYSE, describing himself as “obsessed” with the structure of equities trading. He has boosted technology spending as competition with about 50 U.S. trading venues drove NYSE Euronext’s stock price down 54 percent through yesterday since he became CEO in 2007.
“Reto has done a good job, especially on costs,” said Dirk Hoffmann-Becking, London-based exchange analyst at Sanford C. Bernstein Ltd. “But we are in a different world now. He’s picked a great opportunity at this juncture to move Deutsche Boerse into another league, and credit to him, he’s prepared to step aside to make the deal go through.”
Francioni became CEO in 2005 after shareholders ousted Werner Seifert over his failed attempt to buy the London Stock Exchange. Deutsche Boerse’s stock rose 57 percent through yesterday since his appointment was approved.
Niederauer, who spent two decades at Goldman Sachs before joining NYSE in 2007, has emphasized technology at the 219-year- old company to combat market-share losses. He built data centers in Mahwah, New Jersey, and outside London where customers can house trading systems and bolstered the company’s computer- services unit with the goal of generating $1 billion in sales a year.
“I’m a big fan,” said Dick Grasso, the former chairman and chief executive officer of the New York Stock Exchange who was forced to quit in 2003 after receiving $140 million in pay. “He’s driven the exchange through some of the most competitively challenging waters that the institution has ever seen,” Grasso, 64, said last week. “He’s done an excellent job.”
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