Bloomberg News

Niederauer Keeps NYSE Board Support as Deutsche Boerse Backs CEO

February 02, 2012

Feb. 1 (Bloomberg) -- Duncan Niederauer and Reto Francioni retained the backing of their boards even after regulators in Brussels put an end to their year-long attempt to merge NYSE Euronext and Deutsche Boerse AG.

Directors of NYSE Euronext are “fully supportive” of Chief Executive Officer Niederauer, Jan-Michiel Hessels, the chairman, said in an e-mail. There are “no grounds for any fundamental shift” at Deutsche Boerse, wrote Manfred Gentz, chairman of the supervisory board. Alpine Woods Capital Investors LLC, Haverford Trust Co. and Cambiar Investors LLC said Niederauer would stay while the trade group for German investors praised Francioni.

Rejection by the European Commission means the executives need new ways to cut costs and expand after $37 billion in proposed industry takeovers failed in the last 15 months. NYSE Euronext will resume a buyback, study options for growth and present “pretty detailed 2012 plans” when it reports quarterly results next week, Niederauer said in a phone interview.

“It’s kind of embarrassing, but from my perspective as an investor, it doesn’t really tarnish my perception of the New York exchange,” Peter Kovalski, who owns NYSE Euronext shares at Alpine Woods in Purchase, New York, said by telephone. The firm manages about $6 billion. “It’s more the political or regulatory environment that they’re trying to deal with.”

Surviving the veto would mean Niederauer and Francioni were spared the fate of Werner Seifert, Francioni’s predecessor who was ousted by shareholders after he bid for London Stock Exchange Group Plc.

‘Shot for the Stars’

“Duncan shot for the stars and missed,” Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford, which manages $6 billion and owns NYSE Euronext shares, wrote in an e-mail. “I 100 percent believe he did what he thought was in the best interest of the company’s shareholders. There were few costs in pursuing the merger, considering the upside.”

NYSE Euronext faces no break-up fee because the deal was turned down by regulators rather than shareholders, Niederauer said. The former Goldman Sachs Group Inc. executive and successor to John Thain declined to comment on whether he plans bids for the London Metal Exchange or LCH.Clearnet Group Ltd., each of which has drawn takeover interest.

Niederauer has seen NYSE Euronext’s stock tumble 21 percent since Feb. 8, 2011, the day before he and Francioni announced they were discussing a deal. Deutsche Boerse shares lost 19 percent. Germany’s DAX Index plunged as much as 33 percent between May and September, dragged down as European leaders struggled with the region’s debt crisis.

‘Bad Stock’

“The stock itself has been a bad stock, but I don’t know if that’s management’s fault,” said Brian Barish, president of Cambiar in Denver, which manages about $7 billion including about 4.2 million shares of NYSE Euronext. “We like the management,” he said. “They’ve been pretty successful in navigating the operations side.”

Francioni, who lost to NYSE five years ago in an attempt to take over Euronext NV, told reporters in Frankfurt that Deutsche Boerse will focus on developing products and expanding.

“This is not bad news for shareholders of Deutsche Boerse and certainly not a problem for Germany as a financial center,” Mark Tuengler, managing director of DSW, the trade group for German private investors, said in a statement. “Before, Francioni was forced to sit on the ‘passenger side.’ Now he’s finding himself in the driver’s seat again.”

Biggest Wave

The biggest wave of takeover offers ever for stock and derivatives exchanges foundered as antitrust concern, populist outcry and market volatility scuttled all but the smallest deals. In addition to NYSE and Deutsche Boerse, Singapore Exchange Ltd.’s attempt to acquire Australia’s ASX Ltd. failed, and London Stock Exchange was thwarted in its bid for Toronto Stock Exchange operator TMX Group Inc.

Executives embraced consolidation after the number of U.S. and European trading venues increased by about 50 in the past decade, driving down profitability. NYSE Euronext revenue per European equity trade has dropped 61 percent since 2007 to 64 cents, and in the U.S., the amount per 100 shares is projected to fall 9.8 percent in 2012, according to Macquarie Group Ltd.

Shrinking margins have left derivative venues as the world’s largest exchange companies. Hong Kong Exchanges & Clearing Ltd., with a market value of $18.7 billion and a price- earnings ratio of 27, is the biggest member of the Bloomberg index, followed by CME Group Inc. at $16.4 billion, with a multiple of 14.2. By comparison, Nasdaq OMX Group Inc. is valued at $4.42 billion and trades for 9.7 times earnings.

Finding Growth

“The big challenge is, where will the growth be for NYSE?” Larry Tabb, chief executive of financial services research firm Tabb Group LLC in New York, said in a phone interview. “They have a very tough competitor in CME with pretty much a monopoly on the futures side in the U.S. and a very significant competitor in Europe with Deutsche Boerse. In U.S. equities, volume is terrible and there’s no sign of relief.”

Trading on the Big Board slumped to the lowest level since 1999 last month, with the 50-day average reaching 838.4 million shares on Jan. 25, according to data compiled by Bloomberg. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.

OTC Swaps

Tabb said NYSE Euronext and Deutsche Boerse are likely to seek new business in over-the-counter markets as governments around the world push privately negotiated swaps and other products that can be standardized into clearinghouses.

“The biggest market NYSE really doesn’t have a stake in is OTC derivatives,” Tabb said. Regulators in the U.S. and Europe are writing rules to drive most bilaterally negotiated transactions among market participants into clearinghouses to reduce the potential fallout of a default.

CME, IntercontinentalExchange Inc., LCH.Clearnet Group Ltd. and Depository Trust & Clearing Corp. already have businesses and offerings focused on over-the-counter derivatives. ICE, based in Atlanta, clears most credit-default swaps globally, while LCH.Clearnet dominates the interest rate swaps market.

NYSE Euronext’s growth may initially come from cost cuts, and an expansion of its technology business and its New York Portfolio Clearing unit looks “promising,” Tabb said. The venture with New York-based DTCC clears interest rate futures traded on NYSE Liffe U.S., a venue begun in March that’s also owned by brokers including Goldman Sachs and Morgan Stanley.

Diego Perfumo, an analyst at Greenwich, Connecticut-based Equity Research Desk, said that both NYSE Euronext and Deutsche Boerse should boost earnings by pursuing new business in Asia and other emerging markets, whose economies are growing rapidly.

“They can’t grow just by cutting costs,” Perfumo, whose company advises hedge funds and institutions about exchanges, said in a telephone interview. “They must look to places in the world where there’s growth.”

--With assistance from Joanna Ossinger and Inyoung Hwang in New York and Tom Lavell in Frankfurt. Editors: Chris Nagi, Nick Baker

To contact the reporters on this story: Nandini Sukumar in London at; Nina Mehta in New York at; Whitney Kisling in New York at

To contact the editors responsible for this story: Nick Baker at; Andrew Rummer at

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