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When the rich fall on hard times, they often end up resorting to selling the family jewels to meet their debts or living expenses.
That is the image that came to mind after hearing reports that Deutsche Borse was in advanced talks to merge with NYSE Euronext (ticker: NYX) in a seeming merger of equals. But the German exchange operator would wind up with a majority stake in the New York Stock Exchange, an icon of the city from which it takes its name.
The Big Board is the very embodiment of U.S. capitalism, and for it to fall under foreign control can't help but be disquieting to many Americans. The takeover of this citadel of securities trading at the intersection of what may become Wall and Broad Strasse could raise a similar ruckus as the acquisition of that midtown Manhattan icon, Rockefeller Center, by Japanese investors in the late 1980s.
Beyond symbolism, the potential combination of the NYSE and Deutsche Borse, which operates the Frankfurt Stock Exchange, makes compelling business sense. The Big Board's trading floor has become mainly a set for television reporters to do their stand-ups. Most equity trading has moved to electronic platforms, and the NYSE and its German counterpart are aiming for the ever-burgeoning electronic trade in derivatives, notably options. The combination of the two exchanges undoubtedly would yield significant cost savings, with $300 million annually being one number suggested.
Indeed, the urge to merge has been strong among all exchanges. Before the NYSE news broke, the London Stock Exchange and TMX, which operates the Toronto stock exchange, announced plans to hook up. And, of course, the Euronext side of NYX already operates such Old World bourses as Amsterdam, Brussels, Lisbon and Paris. Finally, the CBOE (CBOE) again was the subject of takeover speculation, with Chicago's CME (CME) the most logical buyer. CME officials have indicated no desire for an acquisition; the operator of the Chicago Merc previously merged with the rival Chicago Board of Trade, from which the CBOE originally sprang.
The combination of Windy City rivals is vastly different from a foreign takeover, however. And the acquisition of the NYSE by a non-U.S. buyer also gives pause because America appeared to have comparative advantage in finance, with the City of London being Wall Street's main rival in terms of breadth and liquidity of markets and innovations in financial instruments.
In that respect, a takeover of NYSE by Deutsche Borse would be different from Daimler's acquisition of Chrysler in the late 1990s. Nobody disputes Germans' comparative advantage in designing and manufacturing automobiles. (Pity so little was transfused to Chrysler.) Still, it's interesting that the automakers' marriage ended in divorce after less than a decade. Similarly, the Japanese owners of Rockefeller Center also ended selling out at a loss after a few years.
It's always a sore point when foreign buyers acquire a country's assets, which suddenly take on strategic importance when they might fall into alien hands. Recall CNOOC (CEO) being thwarted in its attempt to acquire Unocal, which wound up being merged into Chevron (CVX.)
At the other end of the spectrum, it is a bit galling that all the major U.S. brewers were taken over by foreign companies. (Not that I care much about the blah beers from Bud, Miller or Coors; give me a Yuengling, imported from Pennsylvania.) That's also how Britons felt when Cadbury-Schweppes wound up being bought by Kraft (KFT.) Not that we're alone in that; the Canadian government effectively blocked the acquisition of Potash of Saskatchewan (POT) by BHP Billiton (BHP) of Australia.
More importantly, the purchase of U.S. assets by foreign acquirers emphasizes the status of America as the world's largest debtor. The U.S. balance sheet shows $14 trillion more liabilities than assets. America has been able to get away with that for a number of reasons, not the least being that the dollar and the Treasury market offer unequaled safety and liquidity. Once again, it is the U.S. financial markets that are one of the nation's comparative advantages.
Conversely, U.S. investors and corporations ventured abroad because of the higher returns available beyond their own borders. Foreign investors, to a great extent, have accumulated tons of low-yielding U.S. Treasury bonds. It's as if America is one big hedge fund; it borrows cheaply abroad to invest in higher-returning assets around the globe.
Now foreign holders are figuring that, better than holding depreciating dollars, they're converting their greenback holdings into real assets. It's no coincidence that CNOOC since has invested $1 billion in Chesapeake Energy's (CHK) natural-gas properties last year and PetroChina (PTR) announced a $5.4 billion deal to invest in a gas project of Canada's Encana (ECA) Wednesday.
As the dollar sinks steadily under the weight of the U.S. debtor status, which is worsened by continued deficits on the current account (the difference between what Americans earn and what they spend, of which the government budget deficit is a major part), the liabilities to foreign creditors will be increasingly satisfied by the sale of U.S. assets.
The mirror image of that is seen in the sovereign wealth funds of the surplus nations of Asia, the Middle East and some Scandinavian countries. Of the latter, they realized their wealth was based on minerals that one day would be depleted. So, they accumulated financial assets to replace those in the ground.
Bulls say this wave of foreign liquidity will break upon our shores and lift the prices of valuable U.S. stocks. Indeed, America still has by far the largest economy and the biggest bunch of consumers anywhere. And those assets become cheaper to investors abroad as the dollar declines.
But that rationale sound a lot like those commercials touting gold. While some urge you to buy bullion and coins to secure your financial future, others say it's never been a better time to sell your gold now that prices are at records.
Fortunes are to be preserved and passed down to succeeding generations. When the jewelry and silverware have to be sold off to pay off debts, the family's fortune is being dissipated. That's where the U.S. stands as a nation. Luckily, Americans have a lot of nice baubles to sell.
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Comments: E-mail randall.forsyth@barrons.com
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