I was startled at first by the news that Deutsche Börse AG was in advanced talks to take over NYSE Euronext, the parent of the venerable New York Stock Exchange. For most of my life, the Big Board and its iconic all-American imagery—the fluttering flags above the columned façade, the ringing of the bell and the crowded trading floor— has embodied American capitalism.
No doubt some will insist that the NYSE be preserved as a U.S.-based institution. But they may want to consider a recent historical parallel, the London Stock Exchange, which is nearly a century older than the NYSE. After much preliminary skirmishing, in November 2006, the Nasdaq exchange offered to buy the LSE for about $24.70 a share. The offer was promptly rejected by the LSE as failing "to recognize the outstanding growth record and prospects of our group on a stand-alone basis let alone the Exchange's unique global position," as the exchange's chief executive said at the time. LSE shares quickly traded just above the offer price.
As the LSE cranked up its takeover defenses, there was ample nationalistic rhetoric about the importance of the exchange to London's stature as a world financial capital. When Nasdaq's offer expired in February 2007, the American exchange had failed to gain the 50% of the shareholder votes necessary to complete a takeover. In September 2007, Nasdaq sold most of its stake in the London exchange at a handsome profit to Borse Dubai with LSE shares trading at around $28.
So how have the LSE shareholders who deemed Nasdaq's offer to be so grossly inadequate fared? LSE shares were trading this week at $14.40, down 31% from Nasdaq's offer and off 36% from where shares were trading when Nasdaq sold its stake.
Not that the New York Stock Exchange's shareholders fared any better. Since Nasdaq made its offer for the LSE, NYSE shares fell 60% to $37.50 from $95, an even worse performance. I'm sorry to say that I was a shareholder during some of that trajectory, and ended up selling at a loss. Given the New York exchange's lackluster performance, it's no wonder it's a now a takeover target. NYX shares rallied 14% on news of Deutsche Börse's interest.
Of course, no one foresaw the intervening financial crisis, which drove down the value of all the world's exchanges as trading volumes plunged. But other exchanges managed a better performance, such as CBOE Holdings, the result of a merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, and Atlanta-based electronic upstart IntercontinentalExchange.
More fundamentally, when I first invested in the New York Stock Exchange, I considered it and fellow exchanges to be near-monopolies, able to deliver high profit margins to their owners. But technology and the rise of rivals like the IntercontinentalExchange have demonstrated that geography is irrelevant. Face-to-face market making is a historic relic, one that makes a nice photo opportunity on the trading floors in New York and Chicago, but one that has almost entirely been supplanted by computers. Exchange trading already is evolving into a competitive, low-margin business where low costs and large scale will determine the survivors.
No wonder the world's exchanges are rapidly consolidating. Just this week, the London exchange itself, after extolling the virtues of its stand-alone status and its "unique global position," agreed to merge with TMX Group, the Canadian owner of the Toronto Stock Exchange, in a belated recognition that it was at risk of being marginalized. (For these reasons, I'm not interested in owning stocks in any of the publicly traded exchanges.)
Under the proposed Deutsche Börse-NYSE combination, the still-unnamed company would be incorporated in the Netherlands and have dual headquarters in New York and Frankfurt. In a bone to the French, the "technology arm" would be in Paris. Why not put the server farms and technology unit in North Dakota, to cite just one low-cost, environmentally friendly possibility?
The idea that New York will lose its luster as a world business center as a result of the takeover—as some have maintained—strikes me as ludicrous. No one objected when Goldman Sachs Group and other banks moved their back-office functions out of Manhattan. World financial capitals are distinguished by their willingness to embrace the free flow of capital and human talent. Trying to preserve the glories of the past through protectionism is a doomed endeavor (see: the British Empire).
The New York Stock Exchange is indeed a venerable symbol of American capitalism. But using that as a reason for blocking a merger just doesn't hold up.
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