DealBook: At the Big Board, Seeking Rejuvenation in Consolidation

Richard Drew/Associated PressThe New York Stock Exchange on Thursday.

When the chief executive of IntercontinentalExchange approached his counterpart at NYSE Euronext about a merger in late September, they quickly came to terms, hashing out a deal in only three months.

The union just made sense.

NYSE Euronext, the owner of the New York Stock Exchange, facing a slowdown in its core equities trading business, was mulling a number of options after a deal with the German exchange fell apart last year. IntercontinentalExchange, an upstart in the high-growth derivatives market, had long sought both an international platform and a way to expand its footprint in futures trading, having lost a bidding war for a London exchange.

They both got what they wanted.

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On Thursday, IntercontinentalExchange, or ICE, said that it would pay $8.2 billion for NYSE Euronext, creating an imposing trans-Atlantic giant in stocks, derivatives and commodities trading. The deal revives a stalled push for consolidation among market operators at a time when bigger is not only better but necessary.

“It’s about the things that don’t happen,” Duncan Niederauer, NYSE Euronext’s chief, said in an interview on Thursday. “It’s good that we kept the door open. We always thought that this was a good partnership.”

NYSE Euronext has eyed a deal with its younger rival for a while.

In internal discussions with his board three years ago, Mr. Niederauer noted that ICE would complement its core businesses and help the company gain scale. He contended that marrying his slow-growing stock trading business with ICE’s enormously profitable commodities markets would rejuvenate NYSE Euronext.

It would also benefit the crown jewel of NYSE’s portfolio, Liffe, a London-based futures exchange. By teaming up with ICE, the company would add a much-needed platform to settle customer trades. In essence, NYSE would have a one-stop shop for trading and clearing futures.

The merger also seemed unlikely to invoke the ire of antitrust regulators, unlike a deal with a top rival in equities like the Nasdaq OMX Group. NYSE Euronext and ICE have very little overlap in their main businesses.

Last year, NYSE Euronext tried to strike a deal with the German exchange, hoping to create one of the world’s biggest derivatives exchanges. The threat of that was enough to drive ICE’s chief, Jeffrey Sprecher, to partner with Nasdaq on a hostile $11 billion bid for NYSE Euronext.

During that time, Mr. Sprecher — by his own reckoning — criticized the parent of the New York Stock Exchange in as many ways as he could. NYSE Euronext’s board, he said, was “the only obstacle” preventing shareholders from getting a good deal. But the ICE chief said on Tuesday that he had refrained from personal attacks, given his long and friendly relations with Mr. Niederauer.

When the Justice Department blocked the hostile bid on antitrust grounds, Mr. Sprecher wondered whether he had severed their friendship. But several weeks later, after one of ICE’s quarterly earnings presentations with analysts, he received a quick e-mail from Mr. Niederauer. It simply read: Good call.

“It was a magnanimous gesture,” Mr. Sprecher said on Thursday.

Soon, the NYSE Euronext found itself in a bind. European regulators squashed the deal with the German exchange in February, leaving NYSE scrambling to find another solution to its growth problems.

The NYSE Euronext had lost a year in creating a clearing platform for Liffe, putting those efforts aside as it focused on the German merger. And investors continued to lose faith in the company. At a market value of $5.6 billion in June, NYSE Euronext seemed to have little of value but its London unit.

The board considered multiple options, including buying and selling assets. NYSE Euronext joined the bidding for the London Metal Exchange, but dropped out of the race early as the potential price rose. ICE also took a run at the London market, ultimately losing to the Hong Kong Exchange’s $2.1 billion bid.

NYSE and ICE went back to the drawing board. In late September, Mr. Sprecher approached Mr. Niederauer, and the two companies found themselves in alignment on several issues.

Mr. Sprecher indicated that he was willing to maintain two headquarters, ICE’s home in Atlanta and the Big Board’s center in New York City. He hoped the move would help allay concerns from people like Senator Charles E. Schumer of New York, who had warned that the N.Y.S.E. name had to come first in the deal for the German exchange.

The two sides struck a separate agreement in which Liffe would use ICE’s clearing services by next June, even if the merger fell apart. Mr. Sprecher will also weigh a spinoff of NYSE’s European stock markets in an effort to shed nonessential businesses that come with a tangle of national regulators.

During the talks, Mr. Niederauer showed little hesitation in the revamped management structure. When the deal closes, he will be ICE’s president and will report to Mr. Sprecher.
ICE offered a generous premium for NYSE Euronext from the start, according to people briefed on the matter. Eventually, the company sweetened the terms to $33.12 per share in stock and cash. The two sides also calculated $450 million in cost savings in the second year after the deal closes. While Mr. Niederauer met with officials from the CME Group several weeks ago, no rival proposal emerged, some of the people briefed on the matter said. By that point, most of the terms of the deal with ICE had been ironed out.

People involved in the talks said that one date — Dec. 20 — had been circled on Mr. Niederauer’s calendar. The NYSE chief had a longstanding appointment to meet with European regulators the day before, and wanted to have a done deal to present alongside Mr. Sprecher when he met with them.

With NYSE’s board having discussed the transaction at length in meetings last week and on Monday, the two men flew to Europe to make their presentation. They returned to New York City after midnight on Thursday to unveil the deal — one that ultimately reflected the diminished position of the once powerhouse market.

“Let me be clear that this combination — while friendly and strategic — is an acquisition, not a merger of equals,” Mr. Niederauer wrote in an internal memo to NYSE employees on Thursday. “We’ve built a stronger company, with a great brand and a bright future.”

Article source: http://dealbook.nytimes.com/2012/12/20/at-the-big-board-seeking-rejuvenation-in-consolidation/?partner=rss&emc=rss