When I first heard of the Nasdaq OMX/Intercontinental Exchange (ICE) counteroffer for the NYSE Euronext, which has a merger agreement in place with Deutsche Börse, my first thought was that it could not stand up to a Department of Justice review. You are talking about the two biggest stock markets in the United States that account for all or nearly all of new offerings.
I remember arguing with a colleague that merging the two largest U.S. stock exchanges would not be allowed. We talked about the Chicago Mercantile Exchange acquisition of the Chicago Board of Trade and how some folks thought it could be held up by antitrust concerns. I recall that the CME and CBOT’s argument was that they did not compete against each other directly as the CME’s main products were short-term interest rates, equity indexes and meats while the CBOT concentrated on long-term interest rates and grains. Obviously that is an argument that could not be made with a Nasdaq and NYSE hook-up.
But putting together a huge complex merger proposal is extremely costly and disruptive to business so there were obviously some very smart people who though it would survive such a review.
In fact ICE Chairman and CEO Jeff Sprecher suggested that their proposal would have less antitrust risk as a DB/NYSE Euronext merger would in Europe over combining its derivatives business.
And anecdotally, that process seems to have changed dramatically over the last 20 or 30 years as massive megamergers occur on a regular basis. But between the time the CME and CBOT hooked up and CME moved to acquire the New York Mercantile Exchange something appeared to be changing at DoJ. The DoJ sent a letter to Treasury questioning the futures clearing model and suggested that there were deep antitrust issues with the vertical clearing model. The letter stated, “the Department believes that the control exercised by futures exchanges over clearing services - including (a) where positions in a futures contract are held ("open interest"), and (b) whether positions may be treated as fungible or offset with positions held in contracts traded on other exchanges ("margin offsets") - has made it difficult for exchanges to enter and compete in the trading of financial futures contracts.”
The letter raised a ruckus at the time it came out (Feb. 2008) and led people to ask why they didn’t hold up the CME/CBOT tie-up and whether it was a preemptive strike against CME Group’s acquisition of Nymex, which had been proposed but not closed. In the end the Nymex acquisition passed but the DoJ made its feelings known.
Another thing had changed. We had a global credit crisis and a great recession where we had to bailout “too big to fail” institutions. It probably has taken longer than it should have but there are folks beginning to question the era of huge megamergers and starting to raise questions regarding a perceived Laissez Faire attitude at the DoJ and whether a lack of diligence on antitrust issues is a major contributing factor to the mess we find ourselves in. After all, how did too big to fail come about? It came about by mergers of large institutions.
In a statement the DoJ said of a possible Nasdaq/NYSE combo, “the acquisition would have substantially eliminated competition for corporate stock listing services, opening and closing stock auction services, off-exchange stock trade reporting services and real-time proprietary equity data products.”
In defended its planned merger NYSE Euronext and DB focused on the synergies in its deal and did not discuss antitrust issues. But they have their own review to go through, which oddly will most likely come after the shareholders of each exchange vote. I suppose ICE will still be waiting in the wings with their offer for the derivatives side of the business if European regulators come to a similar conclusion regarding the two largest derivative exchanges in Europe as the DoJ delivered regarding the two largest U.S. stock exchanges.
Not sure how it will play out but it appears that regulators are starting to look more closely at larger mergers, which given what has gone on, is probably a good thing.