Nasdaq faces uphill battle in winning NYSE: experts

BOCA RATON, Fla./NEW YORK Wed Mar 16, 2011 4:28pm EDT

A cab drives past the NASDAQ market site in New York's Times Square, March 15, 2011. REUTERS/Brendan McDermid

A cab drives past the NASDAQ market site in New York's Times Square, March 15, 2011.

Credit: Reuters/Brendan McDermid

BOCA RATON, Fla./NEW YORK (Reuters) - Nasdaq OMX Group Inc's (NDAQ.O) possible counterbid for NYSE Euronext NYX.N faces some big hurdles, including funding a complicated deal and convincing Big Board shareholders that it's better than Deutsche Boerse's (DB1Gn.DE) offer, experts said.

Nasdaq is moving closer to making a bid to trump Deutsche Boerse's more than $9 billion deal for NYSE Euronext, but it must first find $5 billion of debt financing.

Any rival offer would also have to account for a relatively steep 250 million euro ($347.5 million) termination fee on the NYSE-D.Boerse deal.

The exchange would also need to team up with the IntercontinentalExchange Inc (ICE.N) which would look to buy NYSE Euronext's lucrative interest-rate future's business, a source familiar with the situation said on Monday.

A Nasdaq offer could value NYSE Euronext between $10 billion and $13 billion, with Nasdaq paying $5 billion to $7 billion of the price, another source briefed on the situation said.

Negotiations were going on about the value of different pieces of NYSE that ICE and Nasdaq would buy as well as other deal terms, the sources said, declining to be named because these discussions are private.

Nasdaq's board is expected to meet on Tuesday to discuss its options, one of the sources said.

NYSE Euronext's shares closed at $37.02, higher than the implied deal price of around $36, suggesting that the market expects a rival offer. The implied value is based on 261.2 million NYSE shares and 195 million D.Boerse shares, according to Reuters data.

BUZZ IN BOCA

On Tuesday morning at an industry conference in southern Florida, the news of a possible Nasdaq deal was center stage, as executives and regulators tried to parse out what motivates ICE CEO Jeffrey Sprecher and Nasdaq CEO Robert Greifeld.

"These guys are deal guys. But the odds of this succeeding are really low," said Joe Gawronski, president at Rosenblatt Securities, an agency broker that does a lot of research on market structure.

"Hostiles are particularly tough in the exchange industry," he said.

Nasdaq could make a rival offer this week, although the situation is still in flux, according to the source.

Even friendly mergers have proven difficult to pull off in an industry in which exchanges are proud national symbols, and when politicians and regulators can block them.

"There is an outside risk, or concern, that our capital markets are controlled by non-U.S. companies. It's a small concern, but it's out there," said Gerry Corcoran, CEO of Chicago broker RJO Futures.

In the end, "it will be an economic, rather than an emotional, decision," he said.

On the sidelines of the conference, hosted by the Futures Industry Association, Sprecher declined to comment on any possible counteroffer.

Earlier this month, however, Sprecher told the Reuters Future Face of Finance Summit that both ICE and Nasdaq did not need to jump into a global mergers frenzy.

Referring to Greifeld, Sprecher said, "My guess is that he has the luxury of waiting to see whether or not some of these other transactions even go forward, or in the process some of the companies become damaged.

RATTLED DEBT MARKETS

Getting the debt markets to play along could be difficult. Last week's massive earthquake and tsunami in Japan has made some lenders wary. Toys R Us this week canceled a planned loan refinancing because of market conditions, market sources said.

Still, ICE and Nasdaq both have real motivation to make a deal work.

A successful counterbid would give ICE, an Atlanta-based futures specialist, a profitable gem in NYSE Euronext's London-based Liffe platform, which is strong in interest rate securities.

ICE's Sprecher launched his bid for derivatives exchange Chicago Board of Trade at this conference exactly four years ago, but later lost out to rival CME Group Inc (CME.O).

Greifeld, too, has in the past failed in a hostile bid for London Stock Exchange Group (LSE.L). He later sealed a deal to buy Scandinavia exchange group OMX.

"The power of a combined Deutsche Boerse-NYSE Euronext creates a really strong entity, and I think it leaves Nasdaq significantly behind," said Larry Tabb, CEO of research and consulting group TABB Group. "What you're seeing is Greifeld is looking to entertain some strategy options."

"ICE's currency is rich and they have less debt on their books, so they've got to be an integral part of this deal," said Tabb, adding ICE and Nasdaq could simply be aiming to launch a bidding war that could damage their fierce rivals.

STOCK TRADING POWERHOUSE

Bringing the Nasdaq Stock Market and the New York Stock Exchange parents together, meanwhile, would create a stock-trading powerhouse in the United States and Europe that would also dominate the business of listing U.S. public companies, and dwarf other U.S. options markets.

But at the conference, some wondered why Nasdaq would make a move that entrenches it deeper into the low-margin stock-trading business that has prompted rivals to diversify to derivatives.

Sweeping regulatory reforms, meanwhile, are pushing much of the world's vast over-the-counter derivatives market onto exchanges and similar venues -- a big opportunity for derivatives exchanges, and another reason cited for the Deutsche Boerse-NYSE Euronext combination.

"If Nasdaq goes ahead with its plans to buy NYSE, they would have to give up aspirations to be a player in OTC because their credit rating would come under pressure," said Diego Perfumo, an exchanges analyst at Equity Research Desk.

Nasdaq's shares closed down 2.1 percent to $25.82, while NYSE rose 1.3 percent to $37.02 and ICE fell 1.2 percent to $123.33.

(Reporting by Jonathan Spicer and Paritosh Bansal, additional reporting by Ann Saphir and Roberta Rampton in Boca Raton; Editing by Derek Caney, Bernard Orr, Phil Berlowitz.)

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