Exchange Consolidation Round-Up

by: Mike Maher

It has been a mixed few days for investors in exchange stocks across the world, depending on which company's shares you were holding. The TMX Group (TMXGF.PK) received a bid of $3.6 billion from the Maple Group Acquisition Corp, a group including some of the largest Canadian banks. The bid is 20% higher than the friendly bid made by the London Stock Exchange (OTCPK:LDNXF), and less likely to invoke the protectionist rhetoric that an LSE acquisition of TMX would have caused.

The Nasdaq (NASDAQ:NDAQ) and Intercontinental Exchange (NYSE:ICE) dropped their bid for NYSE Euronext (NYSE:NYX), saying that the deal was unlikely to pass regulatory scrutiny. That leaves Deutsche Boerse (OTCPK:DBOEY) as the likely winner in the short battle for NYX. Add into these events the Australian government blocking the Singapore Exchange's takeover of Australia ASX last month, and it appears not everyone looking for a dance partner has found one. Here's a look at the spurned exchanges, and potential acquisition targets.

LSE: After fending off a takeover offer from the Nasdaq a few years back, reports surfaced after the LSE's TMX merger announcement that the LSE/TMX tie up would go after Nasdaq later in the year. While the competing bid for the TMX will force the LSE to focus on the TMX for longer than they originally anticipated, the company needs to get a deal done. A combined Deutsche Boerse/NYSE will be a juggernaut, and the LSE will not be able to compete on the scale of that combined exchange. Look for the LSE to look for another partner should the TMX deal not go through, with the Nasdaq a possible candidate.

TMX Group: Recent protectionist rhetoric out of Canada may make the bid from the Maple Group more appealing to regulators from the aspect of it being a Canadian consortium, although there are concerns about having the banks control the exchange, and plans to merge TMX with a rival, Alpha Group, and CDS Inc., a clearing house. Look for TMX to try to get a higher bid from LSE, although it is unclear how high LSE would be willing to bid. Should the Maple Group win TMX, the newly created exchange could use its backing by several strong banks, and the strong Loonie, to actually become a consolidator in the space, if it were so inclined.

Nasdaq: The bid for NYSE Euronext was a long shot from day one, and gives a bit of insight into how desperate Nasdaq is to scale up. The stock trading business is lower margin than futures trading, meaning larger scales and higher volumes drive profitability. The Nasdaq now will have to look at either selling itself, perhaps to a hungry global exchange (Singapore Exchange), or find a new target. The company could try again to buy the LSE, hoping that management there is more receptive now than in 2007. Several media outlets, including the WSJ and Barron's, have named the Chicago Board of Options Exchange (NASDAQ:CBOE) as a logical purchase for the Nasdaq, so that is also a possibility. Either way, Nasdaq is likely to scramble to make a move for fear of being left behind.

ICE: The CEO of ICE, Jeffery Sprecher, has grown his company both organically and through acquisition since the exchange's inception, so joining the Nasdaq on the combined bid for the NYSE Euronext was not a total surprise. The move was likely more of a chance to bid on assets ICE saw as available, rather than the survival type move that the Nasdaq was forced to make. ICE has been growing quickly, and while always on the lookout for acquisitions, expect the exchange to continue to look for opportunities in derivatives, but not in the lower margin stock trading business.

NYX: With the competing bid now gone, it is likely that NYX shareholders will approve the deal with DB. The combined firm will be a global behemoth, spanning the US and Europe and dwarfing smaller exchanges. Deutsche Boerse will not bid against itself, so barring another bidder emerging, there is likely little upside left for NYX.

CBOE: The board of the CBOE has stated several times that the exchange is open to a deal, although there has been little to show for it so far. Given the small size of the company relative to others in the space, and the exclusive license to trade S&P 500 futures and options, as well as the VIX brand, expect the CBOE to attract some bidders. The CME has been a rumored partner in the past, and as I said earlier, several news stories have cited Nasdaq as an acquirer of the CBOE. While buying the CBOE would not give Nasdaq or the LSE the size they need to catch up to DB/NYX or the CME, such a deal would be able to expand the CBOE's products as well as strip out costs, getting a boost to profitability from CBOE's higher margin business.

CME: The Chicago Merc is already a giant, having acquired the CBOT and Nymex during the last period of industry consolidation. Like the ICE, expect the CME to avoid buying into the lower margin stock exchange business, instead focusing on its dominance in commodities, interest rates and other derivatives. Should the CBOE become in play, I would expect at the least for CME to express some interest, if not to buy the CBOE to at least drive up the price.

With this wave of exchange consolidation well under way, the Nasdaq and LSE look the most desperate. Both have had their deals derailed this week, although the LSE has not lost out completely just yet. Each exchange desperately needs to get bigger, for risk of being squeezed out by global giants. The CME and ICE will remain focused on derivatives, and the Deutsche Boerse/NYSE Euronext combination will be a major global player. The CBOE will likely be taken out by someone, seeing as management is willing to deal, and continues to be the most interesting name in the space.

Disclosure: I am long ICE, CBOE.