D.Boerse, NYSE near deal but dodging thorny issues

NEW YORK/FRANKFURT Mon Feb 14, 2011 8:34pm EST

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange February 14, 2011. REUTERS/Remote/Amanda Andersen

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange February 14, 2011.

Credit: Reuters/Remote/Amanda Andersen

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NEW YORK/FRANKFURT (Reuters) - Deutsche Boerse and NYSE Euronext are expected to sidestep thorny political issues as they prepare to announce a deal Tuesday to create the world's largest exchange operator.

The two have hammered out a broad framework for a merger deal that focuses on functions and personalities, with several executives chosen for key posts across Europe and the United States, three people familiar with the plan said.

Another source added that major issues like the exact exchange ratio and the premium to be paid to NYSE Euronext have been sorted out, and a definitive agreement is expected to be announced on Tuesday.

Among the issues they will leave in the too-hard basket for now are what to call the merged entity, how exactly it will cut costs, and which technologies it will favor, sources said.

Putting these off may only add to the questions being asked by some politicians on both sides of the Atlantic about whether the deal should be approved. Any delay could also open the door to rival bidders for NYSE Euronext -- one news report on Monday cited CME Group Inc as a potential buyer.

Some issues facing Deutsche Boerse-NYSE Euronext tie-up, which could still derail the plan, would need to be resolved over the coming weeks, said the sources, who requested anonymity because talks continue.

"The biggest question mark in general is obviously the European political and regulatory landscape coming out of this," one source said.

The boards of NYSE Euronext and Deutsche Boerse are set to vote Tuesday, two sources said. Deutsche Boerse will also publish quarterly results Tuesday.

The Frankfurt- and New York-based companies were center stage in the merger frenzy that erupted last week and heated up on Monday as Brazil's BM&FBovespa said it was eyeing its own prospects and as traders buzzed that CME Group could jump into the fray.

Fox Business Network reported that CME Group, currently the world's top derivatives exchange group, may make a hostile bid for NYSE Euronext, citing bankers.

A spokesman for Chicago-based CME declined to comment. CME officials have been guiding investors away from expectations that the company would do a merger deal.

BM&FBovespa, the world's fourth-largest financial exchange operator, is closely watching for tie-up opportunities, Chief Executive Edemir Pinto told Reuters.

Pinto said BM&FBovespa is interested in China and India as markets where it could pursue expansion because of their growth potential and similarities in terms of products. He added that a partnership with CME also has "room to grow," but did not elaborate.

In Australia, market operator ASX said it was in talks with suitor Singapore Exchange about changes to board arrangements as the sides seek to win political and regulatory support for their proposed tie-up.

'SENSITIVE AND COMPLICATED'

NYSE Euronext's general counsel, chief operating officer and global head of technology are all set to retain their positions in the combined group, two people familiar with the plan told Reuters on Monday.

Andreas Preuss, CEO of Deutsche Boerse's Eurex derivatives unit, would likely be deputy CEO, one source said.

The companies had previously announced that NYSE Euronext head Duncan Niederauer would head the combined company, Deutsche Boerse Chief Executive Reto Francioni would be chairman, and that the German company's shareholders would get about a 60 percent stake.

The board of the combined company would reflect the ownership structure, with 10 of the 17 members coming from the German side, a source said, adding that the numbers include both Niederauer and Francioni.

Job cuts in technology and other issues still need to be worked out in detail, sources said. One source said deciding on a name is "sensitive and complicated," and would take time.

Negotiations over a name and where to locate various operations highlight some of the difficulties in bringing together companies that are both operationally complicated and symbols of national pride.

Past merger attempts have failed over such issues.

The announcement last week that Deutsche Boerse and NYSE Euronext were in talks came within hours of another blockbuster deal in the exchanges sector: London Stock Exchange agreed to buy Canada's TMX Group.

On Monday, Industry Minister Tony Clement said Canada will review the LSE bid under the Investment Canada Act. Clement has 45 days from the moment the review begins to make a decision on whether the deal is of net benefit to Canada. He said he expected that period to begin in one or two weeks.

He can extend that period by a further 30 days, and lawyers have said that scenario is likely. The four Canadian provinces where TMX has operations -- British Columbia, Alberta, Ontario and Quebec -- are also reviewing the deal.

Nasdaq OMX, notably absent in the merger frenzy, suffered a setback Monday when it lost Chief Financial Officer Adena Friedman to private equity firm Carlyle Group.

Friedman, who joined the exchange in 1993 and took the CFO's job in August 2009, led Nasdaq's purchases of OMX AB and the Philadelphia Stock Exchange.

OUTRAGE

In Germany, the deal is being sold as a German takeover of the NYSE or as a merger of equals. Any suggestion that the NYSE management team will be in control counters that public stance and could create an obstacle to the deal getting done.

A supervisory board member at the German exchange said Deutsche Boerse risks ceding control to NYSE Euronext.

"Just like in the Euronext deal, it will be a matter of time before the Americans take control. We should be wary of this. It won't be possible to undo the deal once it is signed," Johannes Witt, a labor representative, said.

Remarks made on Sunday by Senator Charles Schumer that a tie-up would give NYSE managerial control served as a warning, he added.

Under Germany's system of corporate governance, companies operate under a two-tier board structure, with a management board, consisting of executives, and a supervisory board which is half composed of labor representatives. Labor representatives such as Witt play a powerful role in German supervisory boards, which control management boards.

The financial regulator at the German regional state of Hesse, home to Deutsche Boerse, reiterated that it would seek to preserve the interests of Frankfurt as a financial center, when reviewing the plans.

A spokesman for the German Finance Ministry said the role of the national government in the merger would be limited. France has also voiced worries over the role of Paris, formerly home of Euronext, in the combined group.

(Additional reporting by Noah Barkin and Brian Rohan in Berlin, Edward Taylor in Frankfurt, Paritosh Bansal in New York, Ann Saphir in Chicago, Cesar Bianconi in Sao Paulo and Michael Smith in Sydney; Editing by Bernard Orr, Gary Hill)

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