Nasdaq’s clever stupid bid for NYSE

By Felix Salmon
April 4, 2011
David St Hubbins, it's such a fine line between stupid and clever, and Nasdaq's Robert Greifeld is walking that very line with his $11.3 billion bid, with ICE, for NYSE Euronext.

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In the immortal words of David St Hubbins, it’s such a fine line between stupid and clever, and Nasdaq’s Robert Greifeld is walking that very line with his $11.3 billion bid, with ICE, for NYSE Euronext.

Why is the bid stupid? For one thing, it will be very hard to get past antitrust regulators. Even in a world where it looks as though AT&T is going to be allowed to buy T-Mobile USA, regulators are likely to look askance at a single exchange controlling substantially the entire market in US stock listings. And if Greifeld is denied his merger, the setback will be enormous. On top of that, as Antony Currie notes, the bid dilutes the Nasdaq’s current shareholders, and involves taking on a lot more debt to boot.

Aaron Elstein adds a few more reasons to the mix today. For one thing, there’s the touchy subject of the NYSE trading floor, which has stubbornly survived a series of CEOs philosophically inclined to abolish it. Greifeld seems to be doomed to be the latest name on that list: an electronic-trading enthusiast who’s lumbered with an enormous building on the corner of Wall and Broad for the sake of a huge trading floor he neither wants nor needs.

Greifeld’s also, of course, getting the commoditized, low-margin part of the NYSE Euronext business: the stock exchanges. The really profitable bit, the derivatives exchanges, is going to ICE. Here’s Elstein:

The stock exchange business, simply put, is lousy stuff these days. Profits have been squeezed for years, due to technological and competitive pressures, and the reason NYSE wanted to merge with Deutsche Börse in the first place was to turbo-boost its options-trading business.

And politically it’s far from clear that a Nasdaq takeover of NYSE is significantly better than a German takeover. Deutsche Börse promises $400 million in synergies, largely in Europe, while Nasdaq sees $610 million — and for “synergies”, here, read “layoffs”: Elstein thinks that a good 25% of the combined US employees of Nasdaq and NYSE could end up losing their jobs.

But in the final analysis, Greifeld had no choice here. Even a bad merger with the NYSE is better than being left out in the cold, a small, low-margin, marginalized exchange in a world of giants. His best-case outcome now is to become a large, low-margin utility — and that’s not a bad business to be in. Because the only thing dumber than overpaying for an acquisition is losing your relevance and market power altogether.

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Comments
3 comments so far

What makes you so sure that ATT will be allowed to buy T-Mobile? Is it because you think Obama is afraid of being labeled anti-business for opposing a merger that would be good for only two businesses (ATT and DT), while being bad for their business and consumer customers, and their equipment partners?

There is no justification for allowing this acquisition, and if it does happen, there could be no reason to oppose any other merger under anti-trust laws, and the FCC might as well be abolished if they won’t protect the public asset that is wireless spectrum.

Posted by KenG_CA | Report as abusive

> Even a bad merger with the NYSE is better than being left out in the cold, a small, low-margin, marginalized exchange in a world of giants.

First, from whose perspective? I’d rather have a modest stake in an efficient low-margin company that leads its (low-margin) industry than be massively diluted as it undertakes “bad” mergers in order to keep in the news. If I were a shareholder, my welfare would not so that tied up in how prominent the CEO is in White House gatherings. Or do you mean something else?

Second, though I know you are trying to speak more broadly, if there is any giant in U.S. Equity exchanges in our future (which I doubt) it has to be NASDAQ. Anyone trying to rehabilitate NYSE, and stop it from doing any more than coast on past glory and slowly die, has to gut it from top to bottom. Your comments about the trading floor show some recognition of this, but overall I doubt you recognize how great the challenge is. A purchaser of NYSE has to try to maximize profit and slow the decline of its franchise value, while simultaneously trying to bring efficiency within an order of magnitude of a BATS or such … that’s a tall order. IMO the constraints are so large you have more chance of success building up from from something sensible (be it NASDAQ, or even tabula rasa) than trying to reform expensive chaos.

Posted by bxg12 | Report as abusive

You need to US Equities exchanges from other businesses.

Maybe the former are truly becoming “large, low-margin utilities” but if you are going to be the leader in such, is it bad? As a hypothetical shareholder, why is this so obviously, unacceptably, worse than having the CEO undertake (your words) “bad mergers”. It’s not _me_ that gets invited to White House dinners after all – the glamor does not pay my retirement – so why do I care? US equity exchanges may or may not be an interesting business, a profitable business, but if things turn out well it’s clearly NASDAQ in the lead at this point. Why is it rational for a shareholder to ask NASDAQ to risk it all for (media?) prominence in other areas?

With respect to the “world of giants” claim: NYSE is dying in the equities business and it’s unclear how that could change. To fix NYSE would be to gut it from to bottom while somehow retaining – its only live equity-related asset – the brand equity and its consequent listings … but this would be hugely expensive. You comment around the status of the NYSE trading floor shows you have some recognition of this. And there are no other likely U.S. equity exchange giants beyond this zombie and NASDAQ. Yay, competition! :-)

Posted by bxg12 | Report as abusive
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