After watching their plans for market domination through megamergers crumble under the weight of nationalism and regulation, some of the world's largest exchanges now are looking to salvage the financial rewards they would have reaped from consolidation through smaller strategic moves.
Just a year ago it appeared as if big-ticket exchange mergers would be the next big trend in the global financial services industry. But like a house of cards, deals worth a combined $32 billion collapsed, as distaste for foreign ownership of national symbols, along with regulators' concerns about a fair market, managed to trump the investing and trading opportunities those mergers could have created.
With the chance to form transnational powerhouses apparently dead for the foreseeable future, experts say exchanges are now looking to recoup the money they could have earned through merging in a variety of other ways. From strategic alliances with rival exchanges, to forays into the clearing business, to beefed-up technology offerings for customers, the industry has a number of options as it looks to survive amid the rapidly evolving trading landscape.
"The number of large mergers that have not gone through has taught people it's time to look at alternatives," says Per Loven, the head of international corporate strategy at dark pool operator Liquidnet. "The market needs new and innovative solutions to grow. The old exchange model of one size fits all, to me, is not the best way to serve today's diversified marketplace that has so many different participants with so many different interests."
In the aftermath of the German exchange operator's ill-fated $7.4 billion takeover of NYSE Euronext, Deutsche Boerse chief executive Reto Francioni ruled out pursuing another big-ticket acquisition, at least for the time being. Shortly after the merger bid unraveled, the Deutsche Boerse announced plans to fold its data and information technology segments into one unit. The move comes as part of an overall plan to boost sales of its trading system to other exchanges, the company said.
Building on Strategic Alliances
Meanwhile, Francioni reportedly said the firm would continue to look for strategic alliances with peers where it made sense. In March the company said that Eurex, a derivatives exchange that it operates jointly with the SIX Swiss Exchange, entered a partnership with the Singapore Exchange (SGX). Under that agreement, investors who use Eurex's colocation services will be able to participate in SGX's securities and derivatives markets; and SGX's colocation customers will be able to access Eurex's derivatives market as long as they're Eurex trading members.
"These alliances are probably the next big wave for the exchanges, because there's real value in linking up like-minded partners as opposed to trying to do a massive, capital- intensive merger," says Rob Hegarty, the head of global market structure at Thomson Reuters. "I actually think we're going to see bigger alliances between exchanges and non-exchange-type entities."
Nevertheless, coming back from a merger collapse like Deutche Boerse's doomed pairing with NYSE Euronext is no small feat. That deal's demise was especially devastating for the companies' respective shareholders, since they came tantalizingly close to becoming the top dogs in the $700 trillion global swaps market.
Together, the firms would have possessed the largest stock and derivatives marketplace in the world, and they stood to capitalize on new laws in Europe and the U.S. that are slated to force trades that were once conducted over the counter onto exchanges. But European authorities ultimately laid waste to the deal over concerns that the new exchange behemoth would have crushed the competition with a monopoly.
Following the deal's demise, NYSE Euronext is taking a somewhat bolder approach than its would-be parent company. In April, the firm said its futures exchange, NYSE Liffe, would debut a new repo futures marketplace in July. The move is seen throughout the industry as the latest salvo in the NYSE Euronext's fight to gain a leg up on rival CME Group.
And after months of speculation over whether it would pursue clearinghouse operator LCH.Clearnet, NYSE Euronext instead unveiled plans to launch a futures clearinghouse of its own next year. The move gives the firm entree into a potentially lucrative business, since clearing services will be in strong demand in the current regulatory climate.
"That is one of the few natural growth paths for exchanges," Thomson Reuters' Hegarty says. "Clearing over the next three to five years is going to be one of the high-growth industries in the capital markets business."
NYSE Euronext and Deutsche Boerse aren't the only exchange giants that were forced to pick up the pieces after their merger agreements flopped. In the months following its unsuccessful bid to buy Canadian exchange operator TMX Group, the London Stock Exchange was widely viewed as a ripe takeover target for Nasdaq OMX. But the LSE scored a crucial victory in March with the $615 million purchase of clearinghouse operator LCH.Clearnet.
In the Asia-Pacific region, the Singapore Exchange's balance sheet took a hit after its attempt to take control of the Australian Securities Exchange withered in the wake of political pressure down under. But instead of pursuing another high-stakes merger with a fellow exchange, the SGX opened itself up to global investors with the launch of trading hubs in Chicago and London, in addition to the recently announced arrangement with Deutsche Boerse's Eurex.