Fisher Investments Editorial Staff
Globalization, Capitalism

Ich Bin Ein NYSE Berliner

By, 02/17/2011

Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.

Story Highlights:

  • Tuesday, Deutsche Börse AG announced it reached an agreement to acquire NYSE Euronext for $10 billion
  • This news caps a wave of industry mergers among exchanges and should be viewed as a positive as costs tied to facilitating trading shrink.
  • The combined clout of larger exchanges should help maintain economies of scale and leverage technical synergies.
  • If American companies are to continue to thrive and grow, looking abroad to international partners can be important to successfully competing globally.

Deutsche Börse AG confirmed rumors Tuesday when it announced it reached an agreement to acquire NYSE Euronext—the parent company of the New York Stock Exchange—for $10 billion. While some pan the takeover of an American capitalism icon, jingoism and protectionism aside, this merger should be viewed as the latest, largest example of exchange consolidation taking place all over the world.

Notable industry mergers announced recently include the London Stock Exchange acquiring the Toronto-TMX, Brazil's Mercantile Exchange (BMF) acquiring the Bovespa (Brazil's equity exchange), and the Singapore Exchange acquiring Australian exchange operator ASX. This consolidation trend in the exchange business—the matching of sellers and buyers wishing to trade—is a result of decreasing profitability tied to new technologies driving down the cost of trading (which, all else being equal, should be a net positive to investors' bottom lines). Most trades are now executed across the world by ultra-fast computers that can match orders in milliseconds. (However, fear not, CNBC reporters and reality show cast members! There have been no reports of closing the Big Board's still human-powered exchange floor or doing away with the iconic opening bell.)

The proposed combination of NYSE-DB (or will it be called DB-NYSE to Senator Schumer's chagrin?) would create the world's largest exchange operator. And that highlights two aims of the recent mergers:  1) An increased ability to build economies of scale, and 2) a greater ability to leverage technological synergies (increasingly important in the world of exchanges)—reducing costs. Although the business of facilitating stock trades should make up a decreasing part of their combined revenues, their combined clout in the higher-margin derivatives business should more than make up for it—another impetus for the deal.

Also positive, these mergers should provide greater access to a range of companies and investments by managers and individual investors in both countries—although it may take some time for the two companies to integrate their trading systems.

Some fear domestic companies will be less inclined to list on exchanges owned by foreign institutions. However, we find little evidence to support these reservations. The NYSE is already a global player, having acquired Euronext NV (and outbidding Deutsche Börse) for $11 billion in 2007. Since then, there have been few examples of companies on either side of the pond hesitant to list on the exchange because of it's new address.

For now, significant regulatory and political hurdles remain before the pact is sanctioned by officials in both countries, and in the near term, expect protectionist rhetoric. But beyond political speak, if American businesses are to continue to thrive and grow, looking abroad for international partners is increasingly important in the competitive global market.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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