Germany’s Deutsche Boerse (DB1Gn.DE) announced on Wednesday it was in advanced talks to buy NYSE Euronext NYX.N, hours after the London Stock Exchange (LSE.L) said it had agreed to buy Canadian stock market operator TMX (X.TO).
The deals sent shares of exchanges up across the board as investors bet more is to come.
Pressure is mounting on global bourses to seek partnerships to counter the threat from bigger rivals and alternative trading platforms, and to cut costs, analysts said.
“Nasdaq, I think, is probably the odd man out right now,” said Larry Tabb, founder of research and advisory firm Tabb Group. “You would expect Nasdaq to make the next move.”
Nasdaq, given its $5.1 billion market cap and focus on the intensely competitive, low-margin equities business, was more likely to be an acquirer than a target, Tabb said.
Nasdaq might also wait to buy the survivor of two ongoing deals: the London-Toronto deal and a possible merger between Bats Europe and Chi-X Europe, Tabb said.
Still, the LSE-TMX combination could be ambitious for Nasdaq given that it would have a larger market value, and Nasdaq’s shares rallied 6.7 percent on Wednesday, indicating that some investors also view it as a possible target.
The latest deals mark a return of the long-term consolidation trend among exchanges, which was interrupted by the financial crisis.
In the last 10 years, deal activity between exchanges has totaled $94 billion from more than 600 deals, according to Thomson Reuters data.
“On the one hand they are defensive, to contain costs, and on the other hand, they are on the attack,” said Thomas Caldwell, CEO of Caldwell Securities Ltd in Toronto, which owns shares in most of the major global securities markets. “Exchanges have to act to respond to alternative trading systems, and they also have to act to bring their costs down.”
Shares of CBOE Holdings Inc (CBOE.O), which runs the oldest U.S. stock-options exchange, also surged as investors pegged it as an acquisition target.
CBOE is probably an obvious pick in terms of, “if it’s not a consolidator, it’s probably a target,” said Ed Ditmire, an analyst at Macquarie Securities.
CME Group Inc (CME.O) has long been seen as a potential acquirer for CBOE.
CME officials have said they are not planning any large acquisitions and have promised to return excess cash to investors in the form of dividends or share buybacks. A CME spokeswoman declined comment on Wednesday.
IntercontinentalExchange Inc (ICE.N), which trades energy futures as well as over-the-counter swaps, could also be a protagonist in dealmaking in the coming months.
ICE, which bought London-based European Climate Exchange last year for nearly $600 million, sees “a lot of opportunity in the changes that are going on,” Chief Financial Officer Scott Hill said on Wednesday. But he added it is “proceeding cautiously on the M&A side, because what we don’t want to do is we don’t want to acquire to build scale.”
Nasdaq, NYSE and a combined LSE and TMX would also look to Asia, where all three groups would have gaps in their footprints, bankers said.
Exchanges deals, however, are notoriously difficult to pull off. One major challenge is politics as exchanges can tend to be seen as national symbols, making countries skittish about giving control to a foreign entity.
There is very little chance, for instance, China’s Shenzhen and Shanghai Stock Exchanges or the Hong Kong exchange will join the global M&A activity despite their rapid growth.
Vaunted expectations on price and high valuations could also be roadblocks for deals.
“As it relates to CBOE, there is a huge differential in terms of what their shareholders think they are worth and where the market’s valuing them,” a financial institutions investment banker said. “No one is going to bridge that gap.”
The shares of Brazil’s BM&F Bovespa (BVMF3.SA), the world’s third-biggest exchange operator, surged on Wednesday. But “it’s so expensive and so big I don’t know that anyone could buy them,” said Patrick O‘Shaughnessy, an analyst at Raymond James.
CBOE and Nasdaq are among the juiciest targets, said Richard Repetto, an exchange analyst for Sandler O‘Neill. Spokesmen for both exchange declined to comment.
CBOE is attractive for its large market share in the fast-growing market for stock options as well as its profitable and exclusive S&P 500 index options, and Nasdaq for its global technology business as well as its equity and options trading, Repetto said.
While consolidation makes the most sense in the ultra-competitive world of securities trading, some futures markets could also take the opportunity to acquire competitors.
“There is an opportunity for everybody,” he said.
Additional reporting by Ann Saphir in CHICAGO, with Saeed Azhar in SINGAPORE, Phil Wahba in NEW YORK, Kelvin Soh in HONG KONG, Rachel Armstrong in SINGAPORE, Soo Aipeng in SHANGHAI and Tim Kelly in TOKYO, editing by Matthew Lewis