NEW YORK Nasdaq OMX Group (NDAQ.O) Chief Executive Robert Greifeld dampened speculation that his exchange would jump back into the global merger frenzy, cautioning on Wednesday that it could be tough to extract value from such an investment.
On a public conference call discussing Nasdaq's better-than-expected quarterly earnings, the CEO went out of his way to address the merger buzz that's been heard since the company's bid for rival NYSE Euronext NYX.N failed in May, leaving it partnerless in an industry looking to consolidate.
"With our valuation today, those type of external opportunities are that much more difficult to show incremental value above and beyond some capital return to shareholders, or investments in internal growth opportunities," said Greifeld, a cost-cutter and a dealmaker since he took Nasdaq's reins in 2003.
London Stock Exchange Group Plc (LSE.L), also stung by a failed merger plan this year, is front and center in the Nasdaq merger speculation and seen as a good possible fit.
"I am not in London," Greifeld joked on the conference call with analysts and reporters.
The CEO later told Reuters that the $11 billion NYSE bid, which was rejected by U.S. antitrust regulators, did not sow any extra caution as he looks at other possible deals. Nasdaq teamed with IntercontinentalExchange Inc (ICE.N) in the bid.
The Big Board parent itself plans to merge with Deutsche Boerse AG (DB1Gn.DE), putting pressure on Nasdaq and other bourses to do a deal to likewise cut costs and ramp up higher-margin derivatives trading and clearing.
"Nasdaq needs to focus on its future growth strategy amid prospects of escalating competition with the merger of NYSE and Deutsche Boerse," said Diego Perfumo, analyst at Equity Research Desk.
But Nasdaq's 12-month price-to-earnings (P/E) ratio, the measure of expected growth that Greifeld referenced, is 10.9. That's lower than NYSE Euronext's valuation at 15.3, and LSE's at 18.5 -- and would make any stock-based takeover difficult and expensive for Nasdaq.
Nasdaq instead mapped out its post-NYSE bid steps, stressing the need to pay down debt and pursue a bigger chunk of what it sees as a $4 billion opportunity in the U.S. equity market, including offering data, co-location and risk management services to today's high-speed electronic traders.
SPENDING ON SECURITY
Analysts credited Nasdaq's surprise 4 percent net profit rise to a rebound in listings and data revenues, U.S. market share gains, and a lower-than-expected tax rate in the second quarter.
The company boosted its 2011 expense target, due in part to higher security costs on the heels of a hacker attack it suffered last year, and for which an investigation is ongoing.
"As we sit here there are people trying to slam into our system every day," Greifeld said in the interview. "So we have to be ever vigilant against an ever-changing foe here."
Expenses should now total $950 million to $965 million, including merger-related expenses, up from the $920 million to $940 million projected in February.
"It appears the guidance on expenses is up -- that's the big thing," said Richard Repetto, analyst at Sandler O'Neill.
Shares of Nasdaq, which runs U.S. and Nordic European trading venues, were down 3 percent at $23.55.
The results included $29 million in costs related to Nasdaq's failed NYSE bid. Excluding that, Nasdaq earned $112 million, or 62 cents per share, up from $108 million, or 52 cents, a year ago.
Revenue grew 7 percent to $416 million.
Analysts on average expected Nasdaq to earn 60 cents per share on $413 million in revenue, according to Thomson Reuters I/B/E/S.
Nasdaq's trading volume has slumped as U.S. stock market volatility dipped the last four straight quarters, from last year's May "flash crash" highs. Stock trading revenues fell 22 percent in the quarter.
Greifeld said U.S. equity volumes should rebound once there's clarity in Washington over a plan to raise the debt ceiling, adding he's confident the country won't default despite the acrimonious and long-running debate there.
Nasdaq's U.S. market share, however, has rebounded this year to 22 percent and revenue from U.S. equity options, a robust business for Nasdaq, rose 10 percent. In Europe, both cash and derivatives edged up.
(Reporting by Jonathan Spicer, editing by Maureen Bavdek, Derek Caney, Dave Zimmerman)