A 'Black Day' for Europe and a Win for NYSE

NEW YORK ( TheStreet) - Europe may have done NYSE Euronext ( NYX) shareholders a solid rejecting what the $9.5 billion merger between the NYSE and Deutsche Boerse, analysts say.

First, the deal's failure will benefit NYSE Euronext shareholders with a $550 million share buyback program. In addition, killing the deal in the middle of European debt crisis means that the NYSE value won't be dragged down by the Continents all-but-assured recession.

The proposed deal would have created the largest stock and derivatives exchange in Europe and one of the largest in the world, further tying NYSE Euronext's fate to the struggling region. While NYSE investors reacted strongly to an upbeat capital return plan, Deutsche Boerse seemed in far worse spirits on the deal breakup. "This is a black day for Europe and for its future competitiveness on global financial markets," said Deutsche Boerse in a statement.

European officials rejected the merger, calling it a "near-monopoly" in European exchange-traded derivatives and one where, "Any efficiencies would not be substantial enough to outweigh the harm to customers caused by the merger," said the European Commission in a statement.

The deal would have concentrated 90% of European exchange-traded derivatives markets and just under a third of equities trading under one exchange operator. In derivatives, Deutsche Boerse owns Eurex, the biggest derivatives exchange in Europe, beating out NYSE's Euronext's Liffe platform. Throughout the merger, both companies made multiple attempts to quell competition concerns by opening the businesses to rivals and potentially divesting some pieces. In December, the European Union said those moves didn't go far enough.

The merger was expected to create scale and efficiency in both companies trading businesses, potentially helping them to overcome price pressures and falling trading volumes, however the deal breakup may signal that the divestitures needed to close the merger would have outweighed its benefits.

In its deal rejection, European Commission called for the full divestiture of either NYSE Euronext's Liffe platform or Deutsche Borse's Eurex business, two keys to the deal.

"Our merger would have created a high standard for transparency, stability and efficiency in the global capital markets, and we proposed significant and tangible remedies designed to address the European Commission's concerns with the transaction. But as we made clear throughout this process, we would not agree to any concessions that would compromise or undermine the industrial and economic logic of the proposed combination," said NYSE Euronext Chairman Jan-Michiel Hessels.

NYSE Euronext shareholders and analysts may cheer the decision to walk away. While the Wall Street Journal reports that the breakup is unlikely to trigger a EUR250 million breakup fee by either party, there may be other benefits. After fourth quarter earnings on February 10, shareholders of NYSE Euronext are set to receive $550 million in a capital return program that has been authorized to grow to $1 billion, the company said in a statement. Meanwhile, the move may allow the company to consolidate its high European exposure.

" We continue to view the standalone business as attractive at current levels. In fact, we believe the stock could get a lift in the near term as investors that have been on the sidelines because of deal uncertainty come back into the name. We also believe some investors prefer the standalone case as it keeps exposure to a challenging macro environment in Europe in check," wrote UBS analyst Alex Kramm in a note reacting to the deal breakup.

In January, separately, Sandler O'Neill wrote in a research report that NYSE Euronext may be worth $30 a share as a standalone, if the merger were to fail.

For more on NYSE Euronext shares, see Murray Stahl's portfolio at Horizon Asset Management.

Shares of NYSE Euronext opened Wednesday trading up nearly 2% to $27.04 early trading. NYSE Euronext shares fell over 12% in 2011, on dimming prospects for the merger.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

For Deutsche Boerse, there may also be some benefits from the deal breakup.

In December, the U.S. Department of Justice approved the merger, contingent on divestiture of Deutsche Boerse's 31.5% stake in Direct Edge, the fourth largest stock exchange operator in the United States. That retained stake, the end to divestiture plans and an ability to keep current practices in place at Eurex may be a boost to the company.

"In 2011, we paved the way for our further growth with a binding agreement for the acquisition of 100 percent of shares in Eurex. As one of the world's leading exchange groups with an integrated business model that sets us apart from many competitors," said Deutsche Boerse.

In objecting to antitrust reviews, NYSE Euronext and Deutsche Börse made the point that global over the counter derivatives should be considered in calculations the combined company's potential market share, lessening concentration concerns. The merged company would also only hold a sub 20% market share on exchange traded derivatives, less than competitor CME Group ( CME).

"The EU Commission's decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in the market for derivatives. The over-the-counter (OTC) derivatives market, the major part of the market as a whole, is completely precluded," said Deutsche Boearse in a statement

"Whether the market is global or European, the merger would lead to a near monopoly in this product area," the commission said in a set of written questions and answers distributed shortly after its decision to block the deal.

For exchange operators looking to consolidate, the deal blockage caps a miserable few years. Regulators have canceled as much as $37 billion in exchange mergers since October 2010, according to Bloomberg data. Those deals include a DoJ rejection of a competing $11.3 billion bid by Nasdax OMX Group ( NDAQ) and IntercontinentalExchange ( ICE) for NYSE Euronext, a tie up between the Australia's flagship ASX and the Singapore Exchange and a bid by the London Stock Exchange for Canada's TMX Group.

On news the deal breakup, analysts are demure on exchange mega deals. "Scale remains a competitive advantage for exchanges, however going forward we expect management teams are more likely to drive new operating leverage through smaller niche acquisitions that complement existing Product/ technology portfolios rather than transformational M&A to build global footprint across borders," wrote Goldman Sachs analyst Daniel Harris

To be seen is whether NYSE Euronext or Deutsche Boerse return to the deals market. For now, NYSE Euronext is committed to deploying capital to shareholders... and is gunning to have Facebook IPO on its exchange.

-- Written by Antoine Gara in New York

More from Mergers and Acquisitions

Tech M&A Actions Shows No Signs of Abating

Tech M&A Actions Shows No Signs of Abating

Slogging Through the Deep-Value Valley With Valhi and NL Industries in Tow

Slogging Through the Deep-Value Valley With Valhi and NL Industries in Tow

IBM Sells Software Portfolio to India's HCL Technologies

IBM Sells Software Portfolio to India's HCL Technologies

Euromoney Buys The Deal, BoardEx

Euromoney Buys The Deal, BoardEx

Nextstar Media Agrees to Buy Tribune Media

Nextstar Media Agrees to Buy Tribune Media