A Closer Look At M&A Among Exchanges

February 20th, 2013 by Trefis Team
+9.91%
Upside
61.50
Market
67.60
Trefis
NDAQ: Nasdaq logo
NDAQ
Nasdaq
    Quick Take
  • The buzz around the exchange M&A is up again with report of NASDAQ considering going private.
  • We expect M&A to continue in the near future as this space is increasingly becoming cramped – with trading levels remaining sub-par and increased competition from new entrants and alternative venues.
  • However, antitrust laws and nationalistic concerns will to continue blocking mergers between the largest players and most activity is likely to be focused on optimization of business portfolios.

The second largest owner of U.S. exchanges, NASDAQ OMX (NASDAQ:NDAQ) is reportedly in talks with the Carlyle Group, a private equity firm, to take the exchange private, but the deal has hit roadblock due to disagreement on its fair value. This news is indicative of the wave of exchange consolidation which started a couple of years ago and is still continuing. In fact, Bloomberg estimates that almost $50 billion worth of takeover bids have been attempted in this space since 2010. [1] The latest merger of NYSE Euronext (NYSE: NYX), the largest owner of US exchanges and IntercontinentalExchange Inc. (ICE) is already underway.

In this article, we look at the factors that influence consolidation amongst exchanges.

Relevant Articles
  1. Nasdaq Stock Likely To Edge Past The Street Expectations In Q4
  2. What To Expect From NASDAQ Stock?
  3. What To Expect From Nasdaq Stock In Q3?
  4. Is Nasdaq Stock Attractive At The Current Levels?
  5. What To Expect From Nasdaq Stock Post Its Stock Split?
  6. NASDAQ Stock Gained 9% In One Week, What’s Next?

See our full analysis for Nasdaq OMX| NYSE Euronext|CME Group

Increased competition

Most exchanges were once member-based organizations focused primarily on reliability, but it is no longer the case. A significant number of exchanges have since converted into for-profit companies and under the new structure, exchange operator companies must maintain profitability to satisfy shareholders. This translates into inorganic growth tactics to supplement organic growth, especially in times like today when trading volumes are low and have become more of a zero-sum game.

Also, technology has reduced the entry barriers in this market and entities like BATS Exchanges which came into existence only in the past decade now control significant market share. BATS claims to account for nearly 12%-13% of all equity trading in the U.S. on a daily basis. [2]

Low Trading Levels

Over the past few years macro-economic uncertainty and investor skittishness has led to low trading volumes across trading venues. For instance, the total matched volume on NYSE Euronext declined from almost 50 billion in January 2009 to nearly 23 billion in January 2013. Events like the flash crash of 2010 have also hurt investor confidence.

Hence, firms that operate exchanges have had to resort to cutting costs and focus on alternate revenue streams. Often, this means resorting to optimizing of products portfolio by divesting non-core businesses or acquiring firms that have synergy creating elements. NASDAQ OMX’s acquisition of Thomson Reuters’ investor relations and public relations units in late 2012 and NYSE Euronext’s recent decision to sell stake in MCX are examples of this trend.

Rise of alternatives

A major challenge for traditional exchanges is the increasing trend of off-exchange trading through internalization of trades and the use of dark pools. According to NYSE estimates, trading on private U.S. stock markets reached record levels of 38% of all NYSE listed stocks in January this year. [3] Another study by CFA Institute estimates that dark trading accounted for nearly 31% of consolidated volume in March 2012, up almost 48% from the beginning of 2009. ((Dark Pools, Internalization, And Equity Market Quality, CFA Insitute, November 2012)

The rivalry between trading systems and traditional exchanges is set to intensify as alternative trading venues enter the mainstream. According to the Wall Street Journal, Credit Suisse is already reportedly pushing for one of its trading venues called Light Pool, to be turned into an exchange, .

What to expect

The world of exchanges is polarized in nature with only a couple of large players dominating the market. However, the deficit of trading volumes over the past couple of years has left even the largest entities scrambling for market share.

Firms like NYSE Euronext, NASDAQ OMX and CME Group (NASDAQ:CME) have tried on multiple occasions to form alliances, acquire complementary businesses or be acquired by other firms in order to create shareholder value. However, we can safely rule out any major transcontinental mergers in the near term as antitrust laws and nationalistic sentiments will continue to thwart such attempts.

However, we believe that exchanges will continue to be open to mergers and acquisition ideas in the absence of a meaningful growth in volumes, both as buyers and sellers. Further, the involvement of any of one of these players in a major deal could harbinger the announcement of similar deals or counter offers by others as they try to protect market share. Also, as exchange operators try to cut costs and optimize their portfolios, the buying and selling of portfolio companies is likely to continue at a significant pace.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

 

Dark Pools, Internalization, And Equity Market Quality

Notes:
  1. Nasdaq Said to Have Held Talks With Carlyle About Buyout, Bloomberg, February 12, 2013 [↩]
  2. About the BATS Exchanges, BATS [↩]
  3. NYSE Takes Steps To Refill Showroom, Wall Street Journal, February 6, 2013 [↩]