NYSE Rejects NASDAQ, ICE in favor of Sauerbraten

As expected, the NYSE Board rejected the NASDAQ offer to buy them. Anyone that thought the NASDAQ would come in an sweep the NYSE off their feet from their expected nuptials with the DeutscheBorse was living in a cloud. This union won’t be busted up so easily, and the high break up fee is testament to that.

A lot of the debate between the two offers will be between cost savings. That says a lot to investors, and employees. The merger isn’t expected to GROW business substantially.  So this is a merger of efficiency, not to exponentially grow the business.  That’s far different than when CME bought CBOT.  CME has grown certain parts of the business but has left intact many Chinese walls that impede growth.  Those Chinese walls are not present between LIFFE and Eurex.

The key then will be to wring out cost efficiencies. Where are they? Within the NYSE and DB they lie in the integration of technology, smoothing of operations regarding that technology, and operational efficiencies of consolidating and having one exchange talk to regulators. Duncan Niederauer, CEO of $NYX said that he will bring more cost efficiencies to the merger than they thought previously.  That begs the question, why didn’t they find them in the first place?

As far as potential growth in the NYSE/DB merger, I can foresee some growth and efficiency from having the entire European yield curve on one electronic platform, and cross marginable.  That should be good for futures trading growth, which is profitable.  They might be able to put a dent in the US Treasury Futures market, but I wouldn’t hang my hat on it.  Everyone tries to take that away and no one has been successful.

The NASDAQ($NDAQ) is used to being rejected as a suitor.  They passionately made a play for the London Stock Exchange and were thwarted.  ICE ($ICE) has also finished second place in mega mergers.  They tried to steal the CBOT from the CME ($CME) in 2005.

I saw an interview with ICE CEO Jeff Sprecher on television and came away impressed. I think he has a firm handle on integrating businesses and is very entrepreneurial.  I am not as certain of Mr. Griefeld, but really don’t know enough about him to have an opinion either way.  NASDAQ was buffeted more by the stock business going from the exchange to dark pools and back offices more than anything else.  Sprecher has done a very good job with ICE.  That being said, where are the cost savings going to come from?

There will be operational savings similar to the DB merger with regulators and technology operations.  NASDAQ also has options exchanges it can integrate.  The big savings will be in consolidating New York operations though.  If a NYSE-NASDAQ merger is anything like the CME-CBOT merger, there will be huge savings from integrating two domestic exchanges located in the same city.  Employees can be cut, but they can save millions on technology and wring out more savings from the NYSE floor.  They may also be able to utilize the NYSE trading floor to grow their business in a unique way that the DB wouldn’t be able to take advantage of.

The futures volume of the exchange won’t grow as substantially as it would if they merged with DB, because everything would still be fragmented.  It might make for an interesting negotiating dance between ICE and DB though! ICE has a strong presence in Europe, and the addition of Euronext/LIFFE will help expand and deepen it’s footprint.

Even with all this real business stuff-US regulators might not be so keen on the DB owning the citadel of American capitalism.  The Australian regulators came to that conclusion and dinged the proposed ASX-SGX merger.  That ASX/SGX merger was the right thing to do and the bureaucrats got in the way.

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