Don't Play the Market, Buy the Market

Don't Play the Market, Buy the Market

Editor Sara Nunnally

It's common for a big-name stock exchange to partner up with an emerging market exchange, either through the same trading platform or other areas of cooperation. Take Deutsche Börse (DB1:XETRA), for example.

Its XETRA trading system is used in more than 20 countries, and less than a month ago we learned that the Prague Stock Exchange is now linked to XETRA.

And in mid-November, Deutsche Börse announced a strategic partnership with the Moscow Exchange. From the press release:

The exchange organizations agreed on a strategic co-operation and an extensive exchange of information in order to facilitate the further development of the financial markets. Furthermore the co-operation intends to foster and extend the links between the financial centers Moscow and Frankfurt.

The two partners plan to cooperate on exchange infrastructure, product development, IT, and rules and regulations regarding trading, clearing, settlement & custody, collateral management as well as market data and indices.

In accordance with the [Letter of Intent] LoI, the two exchanges are above that to support each other in the further development of their markets in terms of volumes, liquidity and global reach of issuers, intermediaries and investors.

This will give XETRA investors more access to Russian markets, and give Russia more liquidity.

Alexander Afanasiev, CEO of Moscow Exchange, said, "The peer-to-peer partnership between Moscow Exchange and Deutsche Börse will deepen Russia's integration into the global financial system, create favorable terms for foreign investors to access the Russian market, strengthen our economy and aid in the creation of an international financial center in Moscow."

But occasionally, the big fish go after other big fish.

Back in January 2005, Deutsche Börse made a pre-conditional offer for the London Stock Exchange (LSE:London). The offer was withdrawn in March of that year, but that wouldn't be the last time Deutsche Börse wanted to gobble up another big exchange.

On Feb. 15, 2011, the company announced it had entered into a $10 billion "business combination agreement" with NYSE Euronext (NYX:NYSE) that would have created the world's premier global exchange group.

The deal offered $39 a share, which was a big premium to market value at the time. It took a full year before we heard from the European Commission that the merger was prohibited.

I have no doubts that Deutsche Börse is still circling, looking for other exchange groups to snap up... But NYX hasn't been idle, either.

Back in 2006, the NYSE merged with Euronext, and then went on to buy up the American Stock Exchange in October 2008, a 5% stake in India's Multi Commodity Exchange, the CME Group's Metals Complex, a 25% stake in the State of Qatar's Doha Securities Market, and enter a strategic cooperation agreement with the Abu Dhabi Securities Market and the Tel Aviv Stock Exchange, and a Memorandum of Understanding with the Zhengzhou Commodity Exchange in China... just to name a few!

But NYX is off the table.

Early on Thursday, we learned that the Intercontinental Exchange Group (ICE:NYSE) is buying up NYX for $8.2 billion. That puts the per-share value at $33.12 - a 37% premium to Wednesday's close.

Shares jumped 32% on the news.

The merger could save more than $450 million in the second year after closing. And get this... The new company could see 15% earnings growth in the first year. That's not a bad figure, considering the size of this deal.

The transaction is expected to close in the second half of next year. Of course, the two will need to get approval from both U.S. and EU regulators, so there's still a chance NYX could be left out in the cold, like with the Deutsche Börse deal.

That means we've got a half a year to see if NYX shares drop back to the mid-$20s.

I'd consider picking up shares below $27 and waiting to see if the merger takes place. That price point is a big drop from where shares opened after the news, but there's no sense in buying up shares that would give you less than a 5% premium this early in the game.

It'll be a long six months before anything is decided, and I'm betting shares will fall in the meantime.

Happy Investing, Sara




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