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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