NYSE Euronext (NYX) traded sharply higher on Thursday on rumors of a possible merger with Deutsche Borse Group. Now under normal circumstances it would be easy to dismiss these comments, but a few circumstances make a potential merger much more than a passing possibility.
Both companies have already acknowledged that they had discussions late last year but were unable to settle on terms for the deal. Raymond James notes that at the time there were two large activist shareholders that hindered a deal from being inked. Those investors are no longer in play which could allow negotiations to flow between the two companies’ boards.
NYSE Euronext is no stranger to mergers, but has historically been on the buyers side of the table. Currently, the company is working on integrating its Euronext acquisition. Management says the process is going smoothly and the company is on schedule to realize $250 million of cost savings from this merger and another $120 million from the American Stock Exchange purchase. But in a merger with Deutsche Borse, it is more likely that NYX would be the target instead of the buying firm.
Deutsche Borse Group has a larger market cap than NYX and would likely use equity to make its purchase. NYSE investors are bidding the stock higher because in a stock exchange, NYX shareholders would largely get a premium conversion rate while Deutsche Borse shareholders would see their interests somewhat diluted. A combined company would have an incredible global footprint with more than 50% of US option trading, a strong position in the European futures market, and a large portion of the continental European equity markets. Raymond James believes a combined company would face an “integration nightmare” as the two companies attempt to combine systems and save expenses on redundant back office functions.
The rumors actually raise some other possibilities for mergers in the industry. IntercontinentalExchange, Inc. (ICE) has been a strong growth company both organically and through making its own acquisitions. If talks with NYSE Euronext fall through, Deutsche Borse Group could easily approach ICE. Or there is a potential for NYSE to combine with ICE in order to fend off a hostile takeover (although at this point a deal looks to be friendly).
Consolidation in the industry would likely catch the attention of regulators. The current administration is certainly not likely to support any merger that would put individual investors at a disadvantage, and so there may be divestitures required in order to complete the deal. But at the same time the industry has become so technically advanced that it is more possible for small niche companies to set up shop and compete for order flow. As the industry continues to evolve, we will likely see continued consolidation and growth in companies willing to adapt to changes. 
FD: Author has a long position in the ZachStocks Growth Model NYX Notes Enjoy this article? 
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May 24th, 2010 at 5:08 pm
I like this post. Some times rumors are more powerful than the truth.
December 11th, 2010 at 1:13 pm
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