Deutsche Boerse set for NYSE deal as Nasdaq left scrambling

LONDON/NEW YORK Tue May 17, 2011 5:42am EDT

The outside of the New York Stock Exchange is seen in New York May 13, 2011. REUTERS/Shannon Stapleton

The outside of the New York Stock Exchange is seen in New York May 13, 2011.

Credit: Reuters/Shannon Stapleton

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LONDON/NEW YORK (Reuters) - Germany's Deutsche Boerse AG is well on its way to buying the New York and Paris exchanges after U.S. antitrust regulators pulled the plug on an $11 billion rival bid for NYSE Euronext.

The rejection is likely to leave Nasdaq OMX Group Inc (NDAQ.O) -- which had bid for NYSE NYX.N along with IntercontinentalExchange Inc (ICE.N) -- scrambling for another target, although CEO Bob Greifeld may now have less room to launch another high-profile takeover attempt and fail.

Bankers and investors were quick to point to the London Stock Exchange Group Plc (LSE.L) as a potential target. An LSE deal to buy TMX Group Inc (X.TO) ran into problems this weekend, when a group of Canadian banks and pension funds launched a rival offer for the Toronto Stock Exchange owner.

The maneuvers highlight the fragility and complications of dealmaking in the closely regulated exchanges industry, as market operators seek scale, product diversity and global presence to stay relevant and grow.

The latest developments could also further complicate an already convoluted global merger dance in the exchanges sector, as rival bidders and nationalist concerns throw a monkey wrench into one consolidation attempt after another.

Some bankers and investors said LSE and Nasdaq could seek to pursue a deal with each other.

"LSE will look toward Nasdaq if it does not get a deal with TMX. Nasdaq does not bring derivatives, but it is a more attractive option (for LSE) than ICE," a banker familiar with the exchanges industry said.

LSE shares gained 6.8 percent, with markets factoring in a higher chance that the British stock exchange could now seek solace in the arms of Nasdaq.

With Australia turning down a bid by Singapore Exchange Ltd (SGXL.SI) for ASX Ltd (ASX.AX) last month, Nasdaq could also look at a tie-up with Singapore, other experts said.

Nasdaq tried to buy the LSE twice during a previous wave of dealmaking a few years ago, but was thwarted on both occasions by shareholders. Previous approaches to the LSE by Deutsche Boerse AG (DB1Gn.DE), NYSE and Macquarie also failed.

Nasdaq's aborted bids may mean Greifeld would have to be more careful in any future takeover attempts.

"He's lost some margin for other transactional failures," said Keith Wirtz, chief investment officer at Fifth Third Asset Management, which owns more than 60,000 Nasdaq shares.

With the Nasdaq/ICE roadblock removed from its path to acquiring NYSE Euronext for $9.8 billion, Deutsche Boerse looks set to emerge as a global exchanges powerhouse that could force rivals to scale up to stay in competition.

That deal must still win regulatory and shareholder approvals in Europe and the United States, but investors said the odds of a successful merger had now improved substantially.

Sen. Charles Schumer said in a statement the NYSE-Deutsche Boerse deal "has the potential to protect New York jobs and strengthen New York's position in the derivatives markets."

"We will be watching events carefully to make sure New York and the United States are not disadvantaged in any way."

Deutsche Boerse shares rose 3.8 percent as traders cheered its better growth prospects. NYSE shares closed 12.6 percent lower, dropping below Deutsche Boerse offer of $37.58 per share, while Nasdaq was off 2.5 percent.

The decision leaves Nasdaq in a weaker long-term position as the U.S. cash equities business continues to see light volumes and pricing pressures, while U.S. options see increasing competition, according to Jefferies analyst Daniel Fannon.

In a sign of how intense stock market competition is, of the roughly 16.5 million NYSE shares traded so far on Monday, only about 13 percent were traded on the NYSE itself. The rest changed hands on the myriad of other venues.

'SURPRISED AND DISAPPOINTED'

A combined NYSE-Nasdaq would have had a virtual stranglehold on U.S. listings, and the Justice Department said if the bid had not been abandoned it would have filed a lawsuit to stop it.

Nasdaq's Greifeld said his company was "surprised and disappointed" with the decision.

Antitrust experts, however, said it was a textbook case of a merger-to-monopoly that was dead on arrival at the Justice Department's doors.

Nasdaq and ICE were seeking a speedy regulatory review, and one expert said that might have gone against them as well.

"Any time you push the government for a quick decision, you can expect something like this," said antitrust expert Andre Barlow of the law firm Doyle, Barlow and Mazard.

The speed with which the department made up its mind surprised some investors -- Nasdaq and ICE first offered to buy the New York Stock Exchange's parent on April 1.

ICE would have acquired NYSE's London futures market if its joint bid with Nasdaq had succeeded. ICE CEO Jeffrey Sprecher has said the purchase would have been desirable but not necessary.

ICE shares were up 3.3 percent, which Wirtz said was due in part to relief that the Atlanta-based energy exchange operator would not have to take on debt to buy NYSE anymore.

LSE VULNERABLE

Nasdaq and ICE's withdrawal comes a day after the Maple Group -- a name that invokes Canada's most patriotic symbol -- launched a $3.7 billion offer for TMX Group, a bid that is some 20 percent higher than the LSE's.

The British exchange will probably hammer home the message that its combination makes sense because both bourses need scale, something a tie-up with the Canadian banks would not achieve, bankers said.

But Canadian regulators face some unpalatable decisions -- do they allow a foreign takeover or should they opt for a deal giving the country's biggest banks a near monopoly position.

Maple includes four of Canada's largest banks -- Toronto Dominion Bank (TD.TO), National Bank of Canada (NA.TO), Canadian Imperial Bank of Commerce (CM.TO) and Bank of Nova Scotia (BNS.TO) -- each of which is also a significant customer of TMX.

(Writing by Douwe Miedema in London and Paritosh Bansal in New York; additional reporting by Diane Bartz in Washington and Ann Saphir in Chicago; editing by Sophie Walker, Gerald E. McCormick, Steve Orlofsky and Andre Grenon)

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