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Nasdaq OMX Needs Shareholders to Embrace Rejected Bid

Nasdaq OMX Group Inc. (NDAQ), operator of the second-biggest U.S. stock exchange, will take its $11.3 billion unsolicited bid for NYSE Euronext to shareholders after its directors rejected the offer in favor of their merger agreement with Deutsche Boerse AG. (DB1)

NYSE Euronext affirmed its $9.67 billion agreement with Frankfurt-based Deutsche Boerse yesterday, saying it will create more value and has greater odds of winning regulatory approval, according to a statement released after a meeting in New York. Nasdaq OMX Chief Executive Officer Robert Greifeld said his joint bid with IntercontinentalExchange Inc. (ICE) of Atlanta to break up the operator of the New York Stock Exchange has had “very positive” reaction from shareholders.

Failing to win the endorsement from directors including NYSE Euronext (NYX) Chief Executive Officer Duncan Niederauer meansGreifeld must persuade shareholders that his offer, valued 17 percent more than Deutsche Boerse’s, is superior. The bid comes during an unprecedented period of exchange takeovers, with more than $20 billion of proposed acquisitions announced in the last six months.

“Neither of these deals is without risk,” said Ian McDonald, a Baltimore-based U.S. exchanges analyst at T. Rowe Price Group Inc., NYSE Euronext’s biggest owner with a 7.3 percent stake on Dec. 31, data compiled by Bloomberg show. “But a more than 15 percent spread between the offers seems quite large even if it was obvious that one deal was riskier than the other. Shareholders can’t and hopefully won’t ignore that.”

Value of Deals

NYSE Euronext’s five biggest holders as of Dec. 31 — T. Rowe Price, State Street Corp., Vanguard Group Inc., Legg Mason Inc. and Cramer Rosenthal McGlynn LLC — together control 20 percent of the company’s outstanding stock, Bloomberg data show.

Deutsche Boerse’s deal was valued at $36.96 a share at 9:23 p.m. New York time yesterday, compared with the $43.13-a-share offer from Nasdaq OMX and ICE. New York-based Nasdaq OMX and ICE included a cash component of $14.24 a share, while Deutsche Boerse’s deal is all stock.

NYSE Euronext is valued at 14.5 times the average analyst estimate for 2011 earnings under Deutsche Boerse’s bid. The offer from Nasdaq OMX and ICE is priced at 16.9 times those forecasts.

Greifeld and ICE CEO Jeffrey Sprecher will focus on persuading shareholders to vote against the Deutsche Boerse agreement when they meet to consider it, said Ed Ditmire, an exchange analyst at Macquarie Group Ltd. in New York. The companies haven’t set a date for that vote. The annual meeting for shareholders is April 28.

Exerting Influence

“It would be a story of shareholders trying to exert more influence over the procedure,” Ditmire said. “The other thing they could do is urge shareholders to make changes in the board and management in hopes of putting in management that will back the Nasdaq deal.”

NYSE Euronext called the Nasdaq OMX-ICE offer “highly conditional” and said it was likely to result in higher debt and layoffs. Accepting it would subject the companies to antitrust clearance that may not be forthcoming, according to the board’s statement yesterday.

“This proposal that’s been presented, which is loosely worded and full of unanswered questions, may appear on the surface to be more valuable,” Niederauer said in an interview yesterday. “But until you assess the tax leakage, the synergies and the other potential execution risks that we talked about, it’s hard to really say that that’s an apple and an apple.”

Splitting Up

The Deutsche Boerse all-stock agreement keeps NYSE Euronext whole and the combined entity would create a futures exchange operator that rivals Chicago-based CME Group Inc. (CME), the world’s largest. Nasdaq OMX and ICE would split the company, giving Nasdaq OMX the listings, equities and options businesses and combining ICE with the Liffe derivatives platforms.

Nasdaq OMX and ICE said in a statement yesterday that their offer is the “clearly superior proposal,” and that splitting NYSE Euronext’s derivatives and equities units would put the divisions under managers who specialize in those businesses, creating more long-term value.

The Deutsche Boerse deal has about 400 million euros ($578 million) in cost and revenue benefits, according to the Feb. 15 agreement. Nasdaq OMX and ICE said on April 1 that their bid would generate $740 million, accomplished by eliminating jobs and closing trading systems. Deutsche Boerse also faces more risks in integrating the businesses, according to the statement yesterday.

‘Depriving’ Shareholders

“NYSE Euronext’s board of directors is depriving its stockholders of the benefits of a superior proposal, disregarding the fundamental corporate governance principles that it has espoused for the rest of corporate America,” Greifeld said in yesterday’s statement. “The feedback we have received from NYSE Euronext stockholders is very positive, and we would expect NYSE Euronext would, at the very least, meet with us.”

Sprecher said he expected shareholders to voice “displeasure” about the board’s rejection.

“We will continue meeting with investors, customers and regulators to highlight the many ways in which our proposal is superior, not only for the stockholders of NYSE Euronext, but also for market participants in the U.S. and Europe,” Sprecher said in the statement yesterday.

In citing its concern about regulators, NYSE Euronext directors signaled they believe the U.S. government is more likely to object to the monopoly in company listings created by Nasdaq OMX buying NYSE Euronext’s U.S. operations than European regulators are to block the merger on antitrust grounds. Greifeld said he is confident his offer would win approval.

‘Pretty Doable’

“At end of day, both have issues, both have some hair on them, but both are pretty doable,” said Jamie Selway, managing director at New York-based Investment Technology Group Inc. “The level of concern from antitrust regulators, while different, are of equal level on both sides.”

Deutsche Boerse may have an easier time addressing competition concerns than Nasdaq OMX-ICE, said Mark Alexander, a Hartford, Connecticut-based lawyer who focuses on antitrust issues at law firm Axinn, Veltrop & Harkrider LLP.

“With Deutsche Boerse, the antitrust issues are manageable because even if regulators can’t be satisfied that whatever issues there are won’t limit competition, you can divest a business,” Alexander said. “With Nasdaq/NYSE, the antitrust risk is the deal. It appears to be a pretty significant problem and there’s no way to fix it. You can’t sell assets peripheral to the deal, while with Deutsche Boerse the main value of the transaction can still be realized.”

Wave of Deals

A wave of exchange mergers began in October, when Singapore Exchange Ltd. (SGX) offered A$8.35 billion ($8.82 billion) for Sydney- based ASX Ltd. (ASX) London Stock Exchange Group Plc (LSE) said Feb. 8, a day before Deutsche Boerse and NYSE Euronext announced they were in talks, that it would buy Toronto-based TMX Group Inc. for 1.94 billion pounds ($3.18 billion). The ASX deal was blocked by the Australian government last week.

NYSE Euronext is under no obligation to auction itself to the highest bidder under laws governing so-called mergers of equals, and directors can stick with the Deutsche Boerse agreement should they prefer it, according to John Coffee, a law professor at Columbia University in New York. He said the next significant event in the bidding contest is the vote by NYSE Euronext shareholders.

“Its shareholders could vote against the merger, but given the serious antitrust issues with a NYSE-Nasdaq merger, they may prefer the bird in the hand to the bird in the bush,” Coffee said in an e-mail.

Unanimous Vote

Yesterday’s unanimous vote isn’t proof that NYSE Euronext directors prefer the Deutsche Boerse deal, said Peter Kovalski, manager of two financial-services mutual funds at Alpine Woods Investments in Purchase, New York, which manages $6 billion including shares of NYSE Euronext. The board may be trying to spur a higher bid from Nasdaq OMX, he said.

“They’re doing what they need to do,” Kovalski said. NYSE Euronext “may continue to be committed to the Deutsche Boerse deal but go with a better bid from Nasdaq down the road. From a monetary standpoint, I want them to go with the highest price for shareholders. But I don’t want them to walk away from Deutsche Boerse, pay the breakup fee, then encounter regulatory problems with the Nasdaq-ICE transaction and be left out in the cold.”