Brussels blocks stock exchange mega-merger deal

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Deutsche Börse and the NYSE's proposal to create the world's largest exchange operator was rejected by European anti-trust authorities yesterday (1 February), for fear that it would create "a near-monopoly" on derivatives trading.

"The merger between Deutsche Börse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide," EU Competition Commissioner Joaquin Almunia said in a statement.

The European Commission consulted more than 700 market participants and stakeholders during its assessment and said in a 459-page document that the combined entity would make it hard for new players to compete.

"These markets are at the heart of the financial system, and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns," Almunia said.

But NYSE Euronext and Deutsche Börse could try to put the disappointment of their failed €5.6-billion merger deal behind them by turning their attention to European exchange and clearing assets and a less ambitious growth path.

Now, the exchange operators need another way of facing the imperatives that led them to seek mergers in the first place: the need for scale and cost savings amid global competition.

NYSE Chief Executive Duncan Niederauer, in an interview last week in Davos, said the company had another strategy it had been pursuing even as it tried to close on the Deutsche Börse deal.

"We have a standalone strategy that was our strategy before we engaged in this. We carried out a lot of elements of that in 2011," Niederauer told Reuters on Friday. "We will continue to be primarily focused on the derivatives and technologies businesses."

Deutsche Börse and NYSE Euronext declined to comment on the possibility of bids for other assets.

Analysts said the regulatory veto on Wednesday might put a temporary brake on mergers.

"The motivation to do deals is as relevant as ever, with exchanges needing to scale up and seek cost synergies, but the failed deals over the past year will make investors and companies more cautious," said Perrott.

Among other failed deals were Nasdaq and Intercontinental Exchange's bid for NYSE Euronext which was rejected by the US Department of Justice, London Stock Exchange's takeover of TMX Group was halted by shareholders of the Toronto Stock Exchange operator, and Singapore Exchange Ltd's bid for Australia's ASX Ltd was blocked by the Australian government.

 

According to Andreas Geiger from lobbying law firm Alber & Geiger the failed merger "is the result of "some of the worst lobbying" he has seen in over the last years in Brussels.

In complex and sensitive matters like this, he says, "it is just not enough to file your merger notification with the Commission - and then start to pray. This needs to be accompanied by highly professional lobbying work on the top political level."

On 9 February 2011, Bloomberg reported that the Deutsche Börse was in advanced talks to buy NYSE Euronext. The news led both companies to freeze their shares for fear of large price movements before the deal had been signed.

The deal would see the new company become the world's largest stock exchange operator, with listed companies equal to US$15 trillion (€11.4 trillion).

Derivatives have come under regulatory fire since the onset of the financial crisis. The advantage of derivatives is that they allow companies and governments to increase their means of managing risk. The disadvantage is that they are the top instrument for speculative operations and if used irresponsibly, they can increase risk at exponential levels.

Establishing central clearing houses is considered as a moderate way of reducing systemic risk related to derivatives. Instead of being exchanged privately ('over the counter'), they could be processed through an intermediary, a move which is expected to improve transparency and reduce risk. The European Commission clearly supported this approach in a communication published in July 2009.

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