Nasdaq Mulls Offer for NYSE in Bid to Survive Flurry of Exchange Mergers

With a global wave of consolidation sweeping over stock exchange operators, Nasdaq OMX Group Inc. (Nasdaq: NDAQ) is considering a counter-offer for New York Stock Exchange parent NYSE Euronext (NYSE: NYX), buying another exchange or even putting itself up for sale.

The deal-making gathered momentum last week when Deutsche Boerse Group announced a $10.2 billion takeover of NYSE/Euronext. The pressure then grew last week when upstart BATS Global Markets, snapped up rival Chi-X Europe.

Chief Executive Robert Greifeld is leading a team of Nasdaq officials assessing whether it can compete against Deutsche Boerse to buy NYSE, people familiar with the matter told The Wall Street Journal.

If Nasdaq determines it can't put together a stronger bid, the New York company will scour the exchange landscape for another partner or put itself up for sale to ensure it can remain a viable competitor against the combined NYSE/Deutsche Boerse.

The exchange has been looking at teaming up with Chicago Mercantile Exchange owner CME Group Inc. (Nasdaq: CME) and commodities trader IntercontinentalExchange Inc. (ICE) in a joint bid to acquire NYSE, people familiar with the matter told The Journal. Of the two, ICE appears to be the more likely partner, although talks are only preliminary at this point, they added.

The bulk of Nasdaq's business comes from intensely competitive, low-margin equities trading, with derivatives and clearing sales of only $265 million, or 17% of overall net revenue. Nasdaq's derivatives revenue comes mainly from stock options, as opposed to the higher-margin futures business.

By comparison, derivatives trading accounted for 33% of NYSE/Euronext revenues and 40% of Deutsche Boerse's.

Derivatives are a contract between two parties used to hedge risks or speculate. They can be based on an underlying asset such as stocks, bonds, currencies or commodities. They can also be linked to specific events like changes in interest rates.

Derivatives have become so valuable to trading venues because they can yield operating margins of as much as 55%. If completed, the NYSE/Deutsche Boerse merger will create the world's largest futures exchange accounting for 40% of the U.S. options market.

Despite trailing badly in the growing derivatives market, however, Nasdaq has been a leader in technology and expense controls, allowing it to remain competitive, analysts say.

Nasdaq, valued at $5.7 billion, has "been doing just fine, judging by the stock price," Richard Repetto, an analyst with Sandler O'Neill & Partners told The Journal. "But in the long run, they need to be bigger."

But any effort to put together a competing offer for NYSE will face significant obstacles.

Deutche Boerse is guaranteed the chance to match any offer for NYSE and a breakup fee of $337 million, The Journal reported. And before any offer can even be made, the two must agree on the terms and structure of an offer for NYSE.

If Nasdaq decides against mounting a competing bid for NYSE, it might look to expand by buying Chicago Board Options Exchange owner CBOE Holdings Inc. (Nasdaq: CBOE), which is reportedly open to an offer. Conversely, it could consider selling itself to ICE, sources told The Journal.

The latest wave of consolidation in the exchange industry was launched by a $7.9 billion bid by Singapore Exchange for the Australia stock exchange operator ASX Ltd. late in 2010.

That was followed by the London Stock Exchange's agreement to purchase Toronto's TMX Group Inc. in a deal that would create a transatlantic operator worth $7 billion in market value and the world's fifth-largest exchange by trading volume.

But both of those deals have run into strong opposition from lawmakers who see the local exchanges as a source of national pride as well as new capital and business.

TMX yesterday (Wednesday) pressed the case for its deal, warning lawmakers that opposing the merger would damage Canada's reputation as a bastion of open and fair markets.

Canada is putting its reputation for free trade and competition on the line, TMX Chief Executive Thomas Kloet told Reuters.

"One of the things Canada has to make sure to consider as it goes through this is what if it says no," Kloet said, adding he was taking political opposition to a deal "very seriously."

Meanwhile, fearful of being left behind, exchanges in Malaysia, the Philippines, Vietnam, Indonesia and Thailand are building electronic trading links between their markets, Reuters reported. The links are intended to eventually allow cross-border dealing in all their listed shares.

The trading bourses of Asia face considerable hurdles to stock exchange consolidation because of cumbersome regulatory environments and complicated ownership structures.

It will be at least several years before South East Asia's stock exchanges join the global trend towards consolidation, Thailand's market regulator predicted.

"Right now the only linkage is through the electronic means of this project, and that is the only likely option for now," Thirachai Phuvanatnaranubala, Secretary General of Thailand's Securities and Exchange Commission, told Reuters.

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