NYSE backs itself into uncomfortable corner

April 11, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Antony Currie

NYSE Euronext’s board has backed itself into an uncomfortable corner by rejecting out of hand Nasdaq and ICE’s $11.3 billion bid. The Big Board’s directors may be emphasizing strategy over price in saying the agreed, lower-priced deal with Deutsche Boerse still makes more sense. But shareholders probably aren’t as blinkered.

Granted, there are plenty of reasons to be skeptical about the Nasdaq-ICE offer. Nasdaq would need to take on more debt than its covenants currently allow, and Moody’s and Standard & Poor’s have already indicated they may downgrade its credit rating if the bid is successful. Moreover, there’s a good chance regulators would reject as anti-competitive a combination of NYSE’s U.S. stock exchange business with Nasdaq’s.

NYSE Chief Executive Duncan Niederauer made those points in fending off the joint bid. But he also said the Nasdaq-ICE deal ran counter to his exchange’s strategy of the past few years. That’s true: rather than collecting different markets under one roof, they would carve up NYSE’s business as part of the creation of two larger, pure-play exchanges, one focused on stocks and one on derivatives.

But an executive’s preferences alone shouldn’t derail an offer at the right price. Investors have shown a willingness to own specialist exchanges as well as one-stop shops. And Nasdaq and ICE are dangling enticements that might attract some NYSE holders: their offer is funded partly in cash and they reckon it is worth 19 percent more to NYSE shareholders than the Deutsche Boerse deal.

Some NYSE shareholders are already feeling disgruntled. Even Niederauer admitted at the weekend that Deutsche Boerse boss Reto Francioni hasn’t done the best possible job winning over NYSE shareholders, dubbing it a “cultural issue” — a comment that suggests it’s not only the Nasdaq-ICE bid that carries “execution risk.”

Entering into at least preliminary talks with Nasdaq and ICE would have shown that the NYSE’s board was willing to seriously consider all options for its shareholders. Combined with Nasdaq chief Bob Greifeld’s campaign to woo shareholders, NYSE’s cold shoulder approach may make Deutsche Boerse’s lower-priced offer a tougher sell.

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