New NYSE synergies deliver both good and bad news

April 25, 2011

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

Deutsche Boerse and NYSE Euronext shouldn’t feel too proud of themselves for pulling $145 million more of cost cuts from their merger hat. The boost may allow the German exchange to sweeten its offer to help fend off a higher joint bid from Nasdaq OMX and IntercontinentalExchange. But it also suggests the NYSE and its partner grossly underestimated their aggressive rivals.

In isolation, there’s nothing wrong with revising merger synergies. Wary of the fallout from overpromising and under-delivering, plenty of companies mutually agreeing to merge initially offer conservative estimates for removing overlapping operations and staff.

But such added juice usually only shows up after deals close. The NYSE and Deutsche Boerse managed to find a sizable one-third more in promised cost cuts just weeks after announcing a merger they spent months working on — and for which they employed no fewer than eight investment banks.

That adds to the impression the two were unprepared for the advances of the Nasdaq and ICE, and are scrambling to react. Big Board Chief Executive Duncan Niederauer has already publicly admitted that Deutsche Boerse boss Reto Francioni hasn’t done the best job winning over NYSE shareholders.

Granted, the increased savings are still good news for fans of the transatlantic tie-up. Once taxed, discounted and capitalized these could provide the German bourse with the wiggle room to add an extra $1 billion to its offer, significantly closing the gap to Nasdaq/ICE’s offer.

But as Nasdaq/ICE is fond of pointing out, synergies from the NYSE-Euronext merger weren’t as forthcoming as promised. And NYSE’s ability to suddenly find so much more fat to trim adds weight to the aspersions the interlopers are casting about the two wannabe partners’ management and cost-cutting skills.

More worrying for NYSE/Deutsche Boerse is whether the duo’s complacency about the likelihood of a counteroffer extends to anti-trust issues. If U.S. and European regulators don’t share their views about increased concentration on securities exchanges, it could prove fatal for their deal.

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