NYX Nyse Euronext

Exchange operators Deutsche Boerse AG (DB1.XE) and NYSE Euronext (NYX) Wednesday said they will move on from their $17.9 billion combination after the European Union informed them of its decision to prohibit the planned deal.

Both companies said it will now be impossible to fulfill one of the completion conditions for the exchange offer, that the EU clearance must be received by March 31. As a result, the exchange offer will automatically lapse once the merger partners officially receive the prohibition decision, they said. The merger partners will publish the termination offer and will unwind the deal, they said.

NYSE Euronext Chief Executive Duncan Niederauer said that the exchange groups may yet appeal the matter in the EU courts, but that executives would need time to evaluate the ruling before deciding to pursue the matter further. Such an effort could be expensive and take years, and success isn't assured.

"Before we go there we would like for all of us to have some time to digest the decision in full detail, where it's rooted and what we think," Niederauer said in an interview. "But it's something we both would consider."

Both would-be merger partners said Wednesday that the EU Commission concluded "that the combination would significantly impede effective competition and declared the concentration to be incompatible with the Common Market," despite remedies offered by both companies."

With their decision to reject, on antitrust grounds, the plans to create the world's largest exchange in terms of market capitalization, all 27 EU commissioners backed the opinion of EU antitrust chief, Joaquin Almunia.

Almunia had argued that the combined businesses would dominate Europe's on-exchange derivatives trading, giving the proposed new company a 93% market share in that region. He rejected requests by the exchanges for the review to include derivatives that are traded over-the-counter rather than only those on exchanges, which would effectively reduce their total market share to below 15% in Europe and below 4% worldwide. He also rejected calls by the exchanges that the review should take into consideration that today's derivatives market is global.

NYSE Euronext's Niederauer said that neither company had believed that the deal would be tripped up on the market definition. The chairman of Deutsche Boerse's supervisory board called the decision "highly regrettable and very hard to comprehend."

"It negates the existing, fast-growing global competition among exchanges and it contradicts reality in putting up a strict separation between the exchange-traded and OTC derivatives markets. For Europe, the decision squanders a great opportunity to create a globally competitive exchange based in Europe and Germany and with a strong U.S. partner," Chairman Manfred Gentz said.

Deutsche Boerse said, however, that it is in a position for growth even without a merger, following earnings and revenue growth in 2011. NYSE Euronext immediately announced plans to resume a $550 million share buyback program after release of its fourth-quarter results Feb. 10.

Both exchanges now have to consider other, stand-alone options. They are unlikely to come up with a revised merger plan to the current offer which ends March 31. They could challenge the EU decision in court, but such proceedings could take at least a year.

An open question is whether both would-be merger partners, who closely looked into each other's books, will return to their roles as competitors or whether they will join forces on a sub-regulatory level, possibly with a focus on key growth markets such as Asia and Latin America.

Deutsche Boerse shares reacted calmly to the expected rejection, up 1.3% at 1130 GMT.

-By Ulrike Dauer and Jacob Bunge, Dow Jones Newswires; +49 69 29725 500; ulrike.dauer@dowjones.com

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