From the May 01, 2011 issue of Futures Magazine • Subscribe!

Two woo NYSE

Bad rejection?

imageAfter Nasdaq OMX Group and Intercontinental Exchange (ICE) announced their joint bid for NYSE Euronext, NYSE responded that they would "carefully review the proposal."

Only days later, NYSE Euronext rejected the offer. Nasdaq/ICE responded saying, "NYSE Euronext’s Board of Directors, without engaging in any dialogue or discussion, has summarily elected to deny its stockholders the opportunity to benefit from a clearly superior proposal to the announced transaction with Deutsche Börse [DB], a proposed transaction that is indisputably financially inferior."

The Nasdaq/ICE joint bid’s value is $42.50 in cash and stock per NYSE Euronext share, or approximately $11.3 billion, a 19% premium over what DB was offering as of March 31. Under the terms of the proposed acquisition, NYSE Euronext stockholders would receive $14.24 in cash, plus 0.4069 shares of Nasdaq OMX common stock and 0.1436 shares of ICE common stock for each NYSE Euronext share.

The joint proposal includes plans to break up NYSE Euronext with the cash listings going to Nasdaq, and the Liffe derivatives and clearing businesses going to ICE.

That break-up was highlighted in the NYSE rejection announcement. NYSE Euronext Chairman Jan-Michiel Hessels said, "Breaking up NYSE Euronext, burdening the pieces with high levels of debt, and destroying its invaluable human capital, would be a strategic mistake in terms of where the global markets are going, and is clearly not in the best interests of our shareholders."

Analysts, however, say that shareholders likely will not accept that argument in the face of a significantly higher offer.

In its analysis of the competing offers, Financial Services firm Keefe, Bruyette & Woods, Inc. (KBW) states that, although they expected NYSE to reject the Nasdaq/ICE counter offer, "Shareholders will be somewhat disappointed that a higher offer hasn’t come from the DB deal and [we] believe they will likely reach out to management to reconsider the [Nasdaq/ICE] offer."

Richard Repetto, chief financial analyst at Sandler O’Neill & Partners, says, "We believe it is now incumbent on [NYSE] management to make their case to shareholders."

While both analyses cite that the DB/NYSE deal is considered "a merger of equals" and not technically an acquisition, freeing NYSE from legal obligations to seek the best price, that may not play well with shareholders.

The KBW analysis questions whether NYSE shareholders will accept the rejection without an improved DB offer, adding, "We think there may be more to come in this potential merger saga."

Repetto notes that based on the stock performance, there is no clear favorite as NYSE stock traded near the midpoint between the two bids in the first five trading days after the Nasdaq/ICE unsolicited proposal. "We believe it will be incumbent on the [NYSE] management to clearly reflect the deficiencies in the [Nasdaq/ICE] proposal with the spread a good indication of their impact on investors," he says.

During a media call, Nasdaq CEO Robert Greifeld and ICE Chairman and CEO Jeffrey Sprecher estimated the deal would create a total of $740 million in synergies. Greifeld said that they plan to keep the NYSE trading floor open and that all the "synergies would come from consolidating the platforms."

The DB/NYSE deal also will maintain the trading floor.

The regulators have not shown their hand yet and there are questions on both sides. A larger issue may be if shareholders will vote on a deal with what appears to be a larger offer on the table. We should know the answer to that after the NYSE’s annual meeting on April 28.

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