07 Dec 2008
Dec. 7 (Bloomberg) -- Deutsche Boerse AG, faced with the worst annual decline in its stock since it went public seven years ago, is exploring a merger offer for NYSE Euronext, operator of the world's largest stock market.
Europe's biggest exchange commissioned an internal study on the feasibility of combining with its U.S. rival, according to four people with direct knowledge of the situation. Deutsche Boerse's shares dropped 63 percent in 2008 and NYSE slid 76 percent as trading decreased in Europe and competition grew.
"With share prices as low as they are, you could argue that there are some good deals to be had," said James Angel, a finance professor at Georgetown University in Washington who follows exchanges. "I would expect that every major exchange company is doing similar studies."
NYSE Euronext traded for 6.3 times annual profit last week, the lowest ever and down 90 percent from a high of 64.2 in January 2007. Deutsche Boerse fetched 8.1 times earnings in October, a record low, according to data compiled by Bloomberg.
Chief Executive Officer Reto Francioni discussed the report with Deutsche Boerse directors at a Nov. 25 board meeting, according to the people, who declined to be named because the study isn't public. Any plans are at an early stage, they said.
Deutsche Boerse, which runs the Frankfurt stock exchange and is part-owner of Europe's largest futures market, and NYSE Euronext, the owner of the New York Stock Exchange and markets across Europe, have held merger talks, Der Spiegel magazine reported, without citing anyone. A combination may help the exchanges reduce expenses and compete with new trading systems.
Cementing Control
"We have nothing to announce and, as a general policy, don't comment on speculation," Deutsche Boerse spokesman Ruediger Assion said yesterday in an e-mailed statement. "Deutsche Boerse Group is constantly evaluating a multitude of options to enhance the value of the company. This includes frequent contacts with almost every major market participant."
Antoinette Darpy, a Paris-based spokeswoman for NYSE Euronext, declined to comment.
A merger would cement control of Europe's biggest markets in stocks, options and futures for Deutsche Boerse and unite rivals who battled for months over Paris-based Euronext NV before NYSE Group Inc. received approval in 2007 for a $13 billion takeover. Antitrust concern over Deutsche Boerse's offer helped NYSE gain control of Euronext, the operator of the Paris, Amsterdam, Brussels and Lisbon stock markets.
Alternative trading platforms such as Chi-X Europe Ltd., Bats Trading Inc. and Tuquoise are now eating into revenue for the two exchanges, while Nasdaq OMX Group Inc. has gained business from NYSE Euronext in the U.S.
Previous Bids
Deutsche Boerse has been thwarted in bids to acquire exchanges this decade. Prior to withdrawing its offer for Euronext, it unsuccessfully pursued the London Stock Exchange in 2000 and again in 2004. In August 2004, SWX Group, operator of the Swiss stock exchange, rejected a proposal to start merger talks with Deutsche Boerse. An attempt to join with Borsa Italiana SpA fizzled two years later.
The German exchange acquired New York-based International Securities Exchange Holdings Inc. last year.
The enlarged company would be run by Francioni as chairman and the NYSE's Duncan Niederauer as chief executive officer, with an eight-person board and an 18-member directorate, Spiegel said. The exchanges would create a Dutch-based holding company as a vehicle for the combination, Spiegel said. The new company would run its share trading from New York and its derivatives business from Frankfurt, it said.
Global Rout
This year's rout in equities reduced trading on Deutsche Boerse, spurring pressure from shareholders to boost returns. The company's shares have dropped 63 percent this year, valuing Deutsche Boerse at 9.8 billion euros ($12.5 billion). That compares with the 48 percent retreat in the Dow Jones Stoxx 600 Index. NYSE Euronext declined 76 percent, valuing the company at $5.7 billion.
The German bourse has fought over strategy with its two biggest shareholders, New York-based Atticus Capital LLC and London-based Children's Investment Fund Management LLP. Deutsche Boerse said in October the hedge funds have "repeatedly" called for a breakup of the group. In November, Francioni said third- quarter results were "proof of the stability and sustainability of the business model of Deutsche Boerse."
The company last month posted third-quarter profit that beat analysts' estimates as the turmoil in financial markets boosted derivatives trading, offsetting slowing trading volume from equities at the Frankfurt stock exchange and the Xetra electronic trading platform. Deutsche Boerse is also part-owner of Eurex, Europe's largest futures market.
New York-based Nasdaq in February extended its global reach by purchasing Sweden's OMX AB, which runs bourses in seven European cities including Helsinki and Copenhagen. In September, Nasdaq introduced a trading platform to expand beyond Nordic markets and compete against London Stock Exchange Group Plc, NYSE Euronext and Deutsche Boerse.
