BRUSSELS Deutsche Boerse AG's bid to acquire NYSE Euronext faces a hard regulatory battle after the EU's antitrust chief highlighted the anticompetitive dangers of its one-stop shop business model.
The Deutsche Boerse unveiled its $10.2 billion takeover of NYSE Euronext last month to form the world's largest exchange operator, part of a wave of tie-ups in the increasingly competitive and global exchange world.
The merged group would dominate exchange-based European derivatives trading, with operations spanning the United States, Germany, France, Britain, the Netherlands, Portugal and Belgium.
EU Competition Commissioner Joaquin Almunia said he was concerned about the "vertical silo" business model such as that of Deutsche Boerse, under which the company owns the exchange, a clearing house and a depository.
"From the competition point of view, I tend to prefer models that are not a vertical silo," Almunia told a European Parliament hearing on Tuesday.
"More open competition, more opportunities, this more open business model, together with interoperability from the competition point of view, is preferred," he said.
Exchange-traded futures markets typically use a vertical model in which they control activity in their contracts, while stocks use a horizontal model in which securities are free to trade on any venue and to clear at separate clearinghouses.
The vertical model is far more profitable, and a big reason that stock-oriented exchanges globally are merging together to bulk up on derivatives.
"I can't imagine in a million years that (futures) clearing entities would willingly accept contracts executed on another venue without a regulatory mandate to do so," said Paul Zubulake, senior analyst at Boston-based research and advisory firm Aite Group.
"That cuts right at their franchise," he said.
"THINK ABOUT SOLUTIONS"
Antitrust lawyers said Almunia appears to be sending a message to the Deutsche Boerse and the NYSE Euronext.
"It seems to be about derivatives. Almunia seems to be saying that the companies need to think about solutions while they are preparing the notification," said Morten Nissen, a Brussels-based partner at law firm Bird & Bird.
Almunia said he expected a long, hard look into the takeover once it is notified formally to the European Commission, reiterating comments he made to Reuters earlier this month.
"I will not be surprised -- I cannot anticipate, but I will not be surprised -- if this merger, once it is notified, will be one of those cases where we are obliged to go to phase 2," he said.
The Commission, which acts as competition regulator in the 27-member European Union, takes 25 working days for the first phase of reviewing a deal.
A detailed second-stage investigation can take up to 90 additional working days, and the Commission may extend this to 105 working days if companies offer commitments to address any competition concerns.
Deutsche Boerse declined to comment.
The proposed Deutsche Boerse-NYSE Euronext merger has spurred those left on the sidelines to consider their own options, including a possible counter-bid for the Big Board parent from Nasdaq OMX Group, sources said last week.
Terrence Duffy, executive chairman of CME Group Inc, said on Tuesday the giant derivatives exchange operator would find it hard to counter Deutsche Boerse's takeover bid because of the deal's steep breakup fee.
The Chicago Mercantile Exchange parent, which would face off against the combined Deutsche Boerse-NYSE Euronext, also has vertical clearing and settlement as part of its portfolio.
Deutsche Boerse shares slipped 0.5 percent to 53.06 euros on Tuesday, while NYSE Euronext shares rose 1.3 percent to $34.88, and CME Group shares added 0.3 percent to $290.92. Nasdaq OMX fell 0.8 to $25.15.