The biggest wave of takeover offers ever for publicly traded stock and derivatives exchanges has done little for investors in 2011, as more than $21 billion of equity value was erased and only one deal closed.
NYSE Euronext shares have fallen 13 percent in 2011 as German stocks plunged and regulators in Europe resisted its combination with Deutsche Boerse AG. ASX Ltd, the Australian market owner whose agreement with Singapore Exchange Ltd fell through in April, has lost 19 per cent. London Stock Exchange Group (LSE) Plc is down 5.2 per cent after owners of Toronto Stock Exchange operator TMX Group Inc spurned its offer in favoru of the bid from a group of Canadian banks and pensions.
Populist outcry, antitrust concern and some of the most volatile markets on record have prevented the completion of more than $37 billion in announced transactions, according to data compiled by Bloomberg on deals valued at $1 billion or more. Foundering mergers leave exchanges with the same problems they started with, including lower trading margins and diminishing prospects for sales and profit growth.
“The next time any exchange announces any merger whatsoever, I’m selling the stock instantaneously,” Thomas Caldwell, Toronto-based chief executive officer of Caldwell Securities Ltd, which oversees $1 billion, said in a telephone interview. “Every single deal takes a minimum of one year of dissecting, probing, prodding, X-rays and God knows what else. And while you wait a year, stuff happens and it’s all bad.”
Russian deal
Six proposed transactions involving public companies totaling $37 billion failed to close in the past year, the most for any 12-month period, data compiled by Bloomberg show. Russia’s Micex Exchange acquired RTS Stock Exchange on December 19 for $1.5 billion, according to data compiled by Bloomberg. Exchanges completed $28.7 billion of deals in 2007 and 2008.
The 25-company Bloomberg World Exchanges Index fell 20 per cent this year, twice the loss for the MSCI All-Country World Index. The gauge of market operators has averaged gains of 35 per cent a year between 2003 and 2010, falling only in 2008. More than $21 billion was erased from the market value of exchanges worldwide in 2011 as deals were delayed or blocked from Sydney to Toronto and New York, Bloomberg data show.
In the biggest merger, Frankfurt-based Deutsche Boerse has seen the shares it’s offering for NYSE Euronext decline to $6.7 billion from $9.5 billion, after Germany’s DAX Index lost 20 per cent and European Union regulators sought to curb the combined company’s dominance in derivatives. NYSE Euronext added 1.5 per cent on December 22 after the Justice Department cleared the deal.
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Antitrust review
US approval left the merger in the hands of antitrust authorities in Europe, where scrutiny has been greater because it would unite the region’s two biggest derivatives exchanges, NYSE’s Liffe and Deutsche Boerse’s Eurex. EU regulators have a deadline of February 9 to rule on the proposal.
James Dunseath, a spokesman for NYSE Euronext in London, and Heiner Seidel, a spokesman for Deutsche Boerse in Frankfurt, both declined to comment.
“In the 2011 climate, regulators and politicians weren’t disposed to approve these mergers,” Jamie Selway, head of liquidity management at New York-based Investment Technology Group Inc, said in a phone interview. “That surprised a lot of people.”
Executives have embraced consolidation after the number of US and European trading venues increased by about 50 in the past decade, driving down profitability. NYSE Euronext revenue per European equity trade has dropped 61 per cent since 2007 to 64 cents, and in the US, the amount per 100 shares is projected to fall 9.8 per cent next year, according to Macquarie Group Ltd.
Lower margins
Shrinking margins have left derivative venues as the world’s largest exchange companies. Hong Kong Exchange & Clearing Ltd, with a market value of $17.3 billion and a price earnings ratio of 25, is the biggest member of the Bloomberg index, followed by CME Group Inc. at $16.4 billion, with a multiple of 14.4. By comparison, Nasdaq OMX Group Inc is valued at $4.4 billion and trades for 9.9 times earnings.
“Trading is completely commoditised now,” Bruce Weber, dean of the Lerner College of Business and Economics, who co-wrote “The Equity Trader Course” with Robert Schwartz and Deutsche Boerse CEO Reto Francioni in 2006, said in a telephone interview. “The exchange business is no longer as attractive in margin and growth as it was five years ago.”
Derivatives have been an increasing share of NYSE Euronext’s profits. Operating margins at its futures and options businesses were 57 per cent in the first three quarters of 2011, compared with 40 per cent for equities trading and listings, according to NYSE Euronext.
Japanese deal
Tokyo Stock Exchange Group Inc offered this year to merge with Osaka Securities Exchange Co, whose derivatives platform hosts Nikkei 225 Stock Average futures. NYSE Euronext’s deal with Deutsche Boerse would push derivatives to 37 per cent of the combined company’s revenue, according to pro forma data for 2010 from the company. Stock trading and listings would shrink to 29 per cent from 49 per cent of NYSE Euronext’s net revenue for the same year.
Even if the NYSE Euronext takeover collapses, exchange companies will still keep trying to buy each other, according to Macquarie’s Ed Ditmire.
“The underlying rationale for consolidation in the industry is still there,” Ditmire, a New York-based analyst with Macquarie, said in a telephone interview. “‘For NYSE-DB, for example, it’d be hard to imagine easily coming up with a new product over the next decade that would deliver equal cost synergies and bottom-line profit.”
Technology, services
While the profitability of trades is declining, exchanges have so far found ways to keep earnings growing by expanding into trading technology and related services. Profits rose 25 per cent last year for companies in the exchange index. Analysts forecast 2011 earnings will rise 25 per cent, compared with 17 per cent for the S&P 500, data compiled by Bloomberg show.
Every US and European exchange matched or exceeded third- quarter estimates, except Hellenic Exchanges SA, the operator of the Greek bourse, Bloomberg data show. Nasdaq OMX’s 2012 profit projections have increased 8.2 per cent this year following better-than-estimated results that Chief Executive Officer Robert Greifeld attributed to “redefining what it means to operate in each and every one of our businesses,” according to a third-quarter conference call.
Staying Competitive
Earnings based on Friday’s business models aren’t sustainable and companies will have to make acquisitions to stay competitive, according to Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford Trust, which manages $6 billion and owns NYSE Euronext shares.
“In the long run, it’s important that exchanges become global players, and they do that with mergers,” he said in a telephone interview. “That’s the trend.”
Nasdaq OMX shares have fallen 8.5 percent since the company dropped its hostile bid for NYSE Euronext in May after the U.S. Justice Department indicated it would block it. NYSE Euronext’s shares have slumped 36 percent since then. Nasdaq OMX’s partner, IntercontinentalExchange Inc. (ICE), is up 2.5 percent.
Singapore Exchange’s $8.3 billion bid for Sydney-based ASX was blocked in April after lawmakers rejected losing control of the venue to foreigners. London Stock Exchange Group ended its bid for TMX in June after failing to get enough shareholder support for the $3.1 billion deal. That left Maple Group Acquisition Corp., formed by Canadian banks and pensions to bid against LSE, as the only suitor. Canada’s competition watchdog has raised “serious concerns” about that deal.
Restructuring
Deutsche Boerse’s bid for NYSE Euronext may still result in a restructuring of the industry and show whether regulators are ever willing to clear the biggest cross-border mergers. The combined entity would be the world’s largest exchange company, according to the market capitalization of the two stocks.
“On a grand scale, people are watching to see how the merger between the NYSE and Deutsche Boerse does,” Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said in a phone interview. “Momentum will either be gained or lost in the consolidation arena based on what happens there. If you don’t get that deal done, you will likely see consolidation attempts subside.”