Derivatives exchange Eurex has finally gained a foothold in the US with its $2.8 billion cash acquisition of electronic options market the International Securities Exchange (ISE) – announced at the end of April. However, some industry observers are questioning the value of the deal. Eurex, which is jointly owned by Deutsche Börse and Swiss Exchange (SWX), will pay $67.50 per ISE share, which amounts to almost 50% more than the company’s market closing price just before the takeover announcement. The ISE, meanwhile, will retain its current management and governance structure and will continue to operate as a separate SEC-regulated entity, leading some to question what the merger will bring the European exchange other than presence in a new market.
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"It’s difficult to justify that price unless you’re really going to drive synergies out of it, and at this stage it’s not clear what those synergies will be"
Octavio Marenzi, Celent |
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"It’s difficult to justify that price unless you’re really going to drive synergies out of it, and at this stage it’s not clear what those synergies will be. I think the ISE has got a very good price for their stock," says Octavio Marenzi, Paris-based chief executive of consultancy firm Celent, which analyses global listed markets. "The market knew how quickly the ISE was growing, so that was already factored into the [share] price."
Deutsche Börse, however, says pre-tax synergies of $50 million a year have already been quantified. Half the total synergies will be achieved by 2010 and full "run rate" synergies by 2012, said the exchange in a statement, adding that it is attributing an annual $15 million to efficiency gains. It expects about $35 million a year to come from revenue synergies, mainly through cross-selling of existing products. "Both partners strongly believe that the joint product development experience and capability will result in further growth opportunities across asset classes and geographies. This additional potential is not included in the total synergies," said the exchanges.
The combined group would have had trading volumes of 2.1 billion contracts last year. Eurex’s principal offerings consist of euro-denominated fixed income, index and equity derivatives, while the ISE lists dollar-denominated equity options, index options and foreign exchange options. The ISE is estimated to trade about a third of overall US equity option volumes, turning over 600 million contracts last year. It has 164 member firms.
"There’s not much overlap in terms of the businesses, and that makes it a slightly easier merger to pull off in the sense that it’s not a big integration problem," says Marenzi. "But the question is whether Deutsche Börse expects to run the ISE on the same platform as some of its other activities. I would suspect not." Marenzi expects the Europeans to hold on to the ISE "as an investment" and perhaps eventually try to integrate it operationally.
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"Deutsche Börse had to make a statement. They needed to gain a presence quickly and effectively"
Andy Nybo, Tabb Group |
He adds that the important point for Deutsche Börse is that the deal gives the group a proper presence, as opposed to just a beachhead, in the US. "They learnt a lot of lessons from the previous attempt to get into the US market," he says, referring to the failed 2004 attempt to take on the Chicago Board of Trade on its own turf. Setting up shop in the heart of Chicago, Eurex US offered futures and options on two-, five- and 10-year treasury notes, and 30-year treasury bonds. Mainly because of regulatory barriers, though, the new business took longer than expected to get off the ground, which gave the CBOT time to react. By the time Eurex US was up and running, the CBOT had slashed trading fees on its own treasury futures and options. The result was that Eurex’s US business never lived up to expectations, and most of it was subsequently sold to London-based Man Group.
The Eurex/ISE tie-up also gives Deutsche Börse the prestige of a major acquisition following last year’s unsuccessful attempt to bag its big European rival Euronext, when the firm was outbid by the New York Stock Exchange. "Deutsche Börse had to make a statement. They needed to gain a presence quickly and effectively," says Andy Nybo, New York-based senior consultant with financial markets research and advisory firm Tabb Group.
Consolidation pressure
The deal could create pressure for further consolidation among the world’s exchanges – the Philadelphia Stock Exchange is reported to be in talks with rivals, including Nasdaq.
"There’s been a strong move towards being able to offer multi-asset class trading on exchanges, and I think the whole international exchange environment is ripe for consolidation, both across borders and within different regions," says Nybo.