The board of NYSE Euronext on Sunday unanimously rejected a takeover proposal from IntercontinentalExchange Inc. and Nasdaq OMX Group to break up the company, and reaffirmed its commitment to agreed merger partner Deutsche Boerse AG.
The unsolicited Nasdaq-led proposal is valued at around $1.6 billion more than the Deutsche Boerse plan, but the NYSE Euronext board said the Nasdaq-ICE approach carried “unacceptable execution risk,” citing the debt load and negative impact on “invaluable human capital.”
The rejection places the onus on Nasdaq and ICE to sweeten their proposal by lining up agreed funding and working to reduce perceived regulatory barriers, or taking their case directly to shareholders with a hostile offer.
Nasdaq and ICE have already lined up a proxy firm in the event they opt to take their plan directly to shareholders. NYSE Euronext has also hired a firm to run any proxy contest.
Some shareholders Sunday were sounding cautious tones on the NYSE board’s recommendation. “It doesn’t sound as though this action by the New York Stock Exchange is in the best interest of maximizing shareholder returns,” given that Nadsaq’s offer had been more generous, said Hank Smith, chief investment officer at Haverford Investments, which owns NYSE Euronext shares.
The tough regulatory scrutiny facing either proposal on both sides of the Atlantic is expected to make this a long drawn-out contest, though Deutsche Boerse said in a statement Sunday backing the NYSE board decision that it still expected its deal to close by the end of the year.
European regulators have already indicated that a merger that would combine the region’s two dominant futures exchanges–NYSE Euronext’s Liffe and the Eurex arm of Deutsche Boerse–could stretch into next year.
U.S. regulators will also focus on the large share in listed options created by the NYSE-Deutsche Boerse plan, while the Nasdaq-led plan would create a near-monopoly in equity listings. NYSE Euronext directors are also uncomfortable with any plan that breaks up the company, with ICE retaining its futures and over the counter clearing operation while Nasdaq OMX retains the cash equity, U.S. options and technology units.
The level of regulatory uncertainty is likely to encourage NYSE Euronext to draw out any contest for as long as possible rather than agree quickly to open its books or prompt Deutsche Boerse to sweeten its terms, according to one investor with stakes in all of the exchanges involved. This would allow the partners to continue integration planning.
The Deutsche Boerse combination, which would create a $25 billion exchange behemoth with massive reach into cash equities, derivatives and technology services, is “consistent with the long-term strategy adopted by the NYSE Board of Directors in 2009,” which has since been reaffirmed, the company said in a statement on Sunday.
Representatives of Nasdaq OMX and ICE were unavailable for immediate comment.
The move by NYSE directors to overlook the premium offered by Nasdaq OMX and ICE could also pressure Deutsche Boerse to improve its offer for the Big Board parent, ahead of a potential contest for shareholder votes. NYSE Euronext directors come up for election at a previously scheduled annual meeting set for April 28.
Deutsche Boerse has no current plans to improve its deal for NYSE Euronext in terms of cash or structure, according to a person familiar with the matter, but the companies are exploring the potential for increased synergies above the $400 million outlined in the mid-February announcement of the intended combination. The agreement would see Deutsche Boerse shareholders owning 60% of the combined entity, and NYSE Euronext shareholders the rest.
In its own statement Sunday, Deutsche Boerse said “significant progress” has been made in integration planning with NYSE Euronext and that the deal represents “compelling value.”
The joint proposal outlined by Nasdaq OMX and ICE identified $740 million in combined synergies.
NYSE Euronext’s board on Sunday described the unsolicited Nasdaq-ICE offer, which would see Nasdaq OMX take over the equity-linked businesses with ICE buying the London futures segment, as “highly conditional” and subjecting shareholders to “unacceptable execution risk.”
“Breaking up NYSE Euronext, burdening the pieces with high levels of debt, and destroying its invaluable human capital, would be a strategic mistake in terms of where the global markets are going, and is clearly not in the best interests of our shareholders,” company Chairman Jan-Michiel Hessels said in a statement.
Tom Caldwell, chairman of Toronto-based Caldwell Investment Management and a longtime holder of NYSE Euronext shares, said Sunday he expected Deutsche Boerse ultimately to improve its offer, but that the contest for the Big Board’s ownership was likely to go to a shareholder vote following an extended back-and-forth between the involved exchanges as well as regulators.
“In the final analysis, investors are going to be interested in the price they’re going to get for their stock,” Caldwell said in an interview. “My sense is that this is just the first round.”
Bob Greifeld and Jeff Sprecher, chief executives of Nasdaq OMX and ICE, respectively, both have previously waged unsuccessful takeover campaigns–Nasdaq OMX for the London Stock Exchange and ICE for the Chicago Board of Trade. Caldwell said that both are likely to have thought several steps ahead before joining the battle for the NYSE on April 1.
“You are not dealing with amateurs in this process,” Caldwell said.