NYX Nyse Euronext

More than 10 months after the announcement of the proposed $9 billion merger between NYSE Euronext Inc. (NYX) and Frankfurt-based Deutsche Boerse, the deal finally managed to get the anti-trust clearance from the US Justice Department last week.

However, with a view to limit the market share of the merged entity, the US Justice Department demanded the sale of the 31.5% ownership stake of Deutsche Boerse’s wholly-owned subsidiary, International Securities Exchange, in Direct Edge Holdings within two years from the date of the merger.

Additionally, the US Justice Department required the German exchange to give up all governance rights in Direct Edge and submit the details of the same in writing. However, the merged NYSE-Deutsche Boerse entity will have to continue providing some services to Direct Edge, which is the fourth largest exchange operator in the United States.

The agreement was initially announced in February 2011, when eroding market shares had thereby led to a series of attempts by various exchanges to make cross-border deals in the hope of diversification and cost reduction.

The anti-trust authorities are apprehensive as the deal will put about 90% of the exchange-traded derivatives’ market and 30% of the stock trading transactions in Europe under the umbrella of the merged company. Moreover, if the merged entity continues to control the stake in Direct Edge, then it will be in a position to manipulate the activities of the company, which is a direct competitor.

The high combined market share is also the primary concern for European Union’s anti-trust authorities and obtaining approval from them is the chief hurdle for the merger deal at present. The approval will be based on the votes of the commissioners of each of the 27 European Union countries and NYSE and Deutsche Boerse are likely to lobby each of them to obtain their votes.

The two exchanges have been constantly trying to appease the anti-trust authorities by offering various concessions. Last week, the merging entities submitted a proposal to the European Union Commission (EUC), offering to maintain the published clearing and trading fees on the combined entity’s European derivatives transactions at the current level over a three-year period, in the event of clearance of the merger.

Before that, NYSE and Deutsche Boerse had offered to divest the single-stock equity derivatives business of NYSE’s Liffe in Brussels, Paris, Lisbon, Amsterdam and London. Additionally, the exchanges agreed to provide access to DeutscheBoerse’s Eurex Clearing to outsiders, including rivals, for some products. Alongside, the parties-to-merger also agreed upon licensing Eurex trading to third parties, who are interested in initiating interest rate swaps on this platform.

However, the EUC is worried regarding the huge market share and the amalgamation of trading and clearing functions in the merged company, which might put rivals at a competitive disadvantage and also push out new entrants.

However, NYSE and Deutsche Boerse are trying to convince the authorities that a majority of their derivatives are traded as over-the-counter products and not through any exchange, thereby leaving substantial scope for competitors. A final decision from the EUC is expected by February 9, 2012.

Previously, in April, NYSE had faced a counter-bid from arch rivals NASDAQ OMX Group Inc. (NDAQ) and its commodities partner IntercontinentalExchange Inc. (ICE) but the U.S. Department of Justice had rejected it over anti-trust concerns. Another rival, London Stock Exchange Group Plc. had attempted a tie-up with Canada’s TMX Group Inc. but nationalistic concerns had forced them to abandon the deal.

The other deals were either unable to gather enough investor support or faced regulatory and political hurdles and collapsed. The NYSE - Deutsche Boerse deal has been one of the few to have reached this, along with the proposed merger between BATS Global Markets Inc. and Chi-X Europe.

Currently, NYSE carries a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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