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It's fitting that a bidding war among securities exchanges became the leading deal news as last week ended and a new quarter began. That's because deal news in general has become an animating theme of the action on the stock exchanges in recent weeks, as the indexes have roughly returned to their 2011 highs set back in February.
This is all happening on cue, with the financial-engineering stage of the bull market getting moving. When the corporate profit-margin cycle matures, CEOs' fancy turns to thoughts of buying growth and scale, and today the credit markets -- medicated as they may be -- remain quite generous.
All these incentives are at play in the move by Nasdaq OMX (ticker: NDAQ) and Intercontinental Exchange (ICE) to jointly try to buy, and split, NYSE Euronext (NYX), thereby breaking up the friendly merger agreement between NYX and Germany's Deutsche Börse, reached in February.
The proposal, about one-third cash and two-thirds a combination of Nasdaq and ICE stock, would be worth close to $43 per NYX share, as of Friday's close, about a 20% premium to the value of the Deutsche Börse deal to NYX shareholders.
Nasdaq would keep NYX's U.S. stock- and options-exchange businesses (including its onetime rival the New York Stock Exchange), and get Euronext's Continental European exchanges. ICE, which made its name upending the energy-futures business via cheap electronic trading, would get NYX's European derivatives marketplaces, including the Liffe futures exchange.
There are merits to each deal, which is mostly a way of saying that there are inherent merits in cross-border securities-exchange mergers. It's a high-fixed-cost business that rewards geographic and technological scale. Trading -- in funds and the companies and instruments they invest in -- is largely global, so spanning continents lets exchanges capture more business.
As for the other drivers mentioned above, most exchanges already have gotten most of what they are likely to get from internal efficiencies and margin expansion. And those pliant debt markets would fund the bid's cash portion.
Nasdaq and ICE are using some contentious arguments to support the claim that their offer is superior. One is an appeal to domestic sentiments and politics. It's the claim that a Deutsche-NYX union would exacerbate a trend of many international companies listing shares outside the U.S. They further hint that Deutsche Börse has done a poor job of executing past mergers.
Then there is the suggestion that combining the Nasdaq and NYSE stock-trading operations could helpfully reverse the trend toward fragmented trading forums -- in which literally dozens of exchanges and other trading systems vie for the same order flow -- and thereby foster more liquid markets.
This assertion is both true and potentially troubling. Never mind the vast irony that Nasdaq's identity for most of its 40 years has centered on the virtues of creating alternatives to monopolistic trading venues. Times, and market realities, change, I guess.
There are also the potential, though probably surmountable, antitrust pitfalls, and the possibility that Nasdaq could find itself insisting to regulators that centralizing orders cuts investor costs, while whispering to its shareholders that it offers the chance for higher profits for itself.
NYX, meanwhile, could plausibly argue that Nasdaq's proposal to combine its U.S. and European cash-equity and U.S. options exchanges offers less stability than would the Deutsche combination, with its heavy tilt toward more-lucrative derivatives markets.
Now comes a game of four-way poker -- or maybe more than four, if any new entrants come to the table -- in an industry that has seen more than its share of failed or complicated, unfriendly bids. Both NYX and Deutsche leaders Friday made the standard noises about sticking with their deal. NYX's board will review its options. Deutsche Börse, which is due a hefty $350 million breakup fee if NYX goes elsewhere, is likely to respond within a week, says Keefe Bruyette & Woods analyst Niamh Alexander.
The market seems to place a decent possibility on a higher Deutsche bid and/or a successful Nasdaq-ICE purchase. NYX traded up 12.6% Friday, to within less than 10% of the Nasdaq-ICE bid's value. Investors loved the implications for Nasdaq, once seen as lacking many good options under the status quo. Its stock jumped more than 9%. As my colleague Steven Sears points out, the offer price may seem high, but it is worth paying. If NYX gets away, Nasdaq would effectively be blocked out of the European markets, and destined to become little more than the exchange-technology company.
E-mail: michael.santoli@barrons.com
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