Trader Talk

What's Next for NYSE


NYSE-Deutsche Boerse merger: another push is coming, but time to think post-deal.

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NYSE CEO Duncan Niederauer, in a video to employees this morning, acknowledged that the staff of the EU competition commissioner appear to be recommending against the merger. He said "appears" because no one has told him yet; we are dealing with nothing but leaks so far.

Could a miracle happen and the merger still happen?

It's been widely noted that the EU Commissioners have only overruled the competition staff in 10 percent of the cases.

Is there a compelling reason to support this in Europe? Why would Germany's Angela Merkel support the merger, for example?

The main argument: this would reinforce Frankfurt as the center of global capital raising. This will be the biggest, most diversified exchange in the world; it will help with capital raising in Europe; there are also huge efficiencies that could be gained from the merger.

Is that compelling enough? Doubtful.

It will shortly be up to Niederauer to outline a compelling stand-alone strategy.

The two big bullets:

1) capital management. If the deal gets nixed, they have a bunch of cash they're sitting on — about $500 million by the end of 2011. Debt ratios are low, so they could raise debt without impacting their credit rating.

So what do they do? Borrow money and use existing cash to buy back stock.

2) more cost reduction. That means more staff reductions, and looking for more ways to save money: cost cutting at data centers, and building out their own clearing center (they currently outsource to LCH Clearnet in London).

The problem: this is pretty thin gruel. This is hardly the stuff that excites investors. How do you grow topline? How to deal with an ominous drop in global trading activity, which is showing no signs of picking up in 2012? You may have to just weather the storm and assume business will pick up. At some point, there will hopefully be tailwinds: better FX rates, higher interest rates, more interest in equities.

Exchange consolidation: is it all dead? If NYSE-Deutsche Boerse falls apart, who else is out there to merge with? Australia/Singapore, and London Stock Exchange/Toronto also got nixed. Strike three with NYSE/Deutsche Boerse.

Who else? Tokyo? Merging with the Osaka Exchange. Shanghai? They're private.

Brazil? That is the kind of deal that will likely not be attempted as well — lots of heavy nationalism.

There's smaller deals possible: the London Metals Exchange (LME) is in play. LCH Clearnet is in play. Those are possibilities.

CME/NYSE? ICE/NYSE? Hmm. CME/NYSE would have all the financial futures in the U.S., along with a big futures house (LIFFE) in Europe, that could be a problem.

ICE has the clearing house that NYSE is trying to build, and a different asset class (energy, soft commodities) that the NYSE wants to be into.

If I had to bet on something happening, I would bet on ICE/NYSE.

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