Deutsche Boerse AG's planned takeover of NYSE Euronext faces intense scrutiny from German regulators and European antitrust authorities, potentially imperiling the blockbuster exchange tie-up.
It could also run into hurdles in Washington as U.S. lawmakers and regulators consider whether they are prepared to allow the citadel of American capitalism to fall into foreign hands, although there has been virtually no public criticism in the United States as yet.
The companies said Wednesday they are in "advanced talks" to join forces and create an exchange operator with unprecedented global reach and — most worrisome for regulators — a dominant grip on Europe's lucrative derivatives markets.
While executives from Frankfurt and New York have hatched a tentative agreement, there are still obstacles that must be overcome — the same ones that scuppered past attempts to combine Deutsche Boerse with Paris-based Euronext.
"These key questions are not yet resolved," a senior German financial source told Reuters on Thursday.
A financial regulator from the German regional state of Hesse — which must approve the deal — said it would seek to preserve the interests of Frankfurt as a financial center. Likewise, French regulator AMF said it would be vigilant about preserving Paris' status.
Once notified, European Commission competition authorities initially have 25 days to decide whether to approve a deal but can also seek an in-depth investigation that can take some months including extensions.
"The biggest danger of a failure for the deal at this point is antitrust concerns in the derivatives market, because Eurex and Liffe would have a market share of more than 90 percent in Europe," said Stefan Brugger, a fund manager at Union Investment in Frankfurt. "We consider these concerns as overdone," he added.
U.S. politicians were unusually quiet about the deal that would see the Big Board bought out and would put more than 40 percent of U.S. options trading under one roof.
New York Mayor Michael Bloomberg, the first major U.S. public figure to comment, said he supported the plan. "It's going to give us access to Europe, and the Europeans access to the States in a way that our competitors, like London, will not have," he told reporters in New York.
While U.S. Representative Carolyn Maloney of New York said she supported the deal, five senior lawmakers with market oversight duties declined to comment. And U.S. Commodity Futures Trading Commission Chairman Gary Gensler declined to comment.
In another sign that barriers remain in Europe, French Economy Minister Christine Lagarde said she was watching negotiations closely with an eye on market stability and security, and the development of value on French soil.
The companies have released few details about the proposed merger, which would see Deutsche Boerse's shareholders in the driving seat with 60 percent control and create an exchange behemoth with more than $20 trillion in annual trading volume.
The combination of Deutsche Boerse's Eurex and NYSE Euronext's London-based Liffe platforms would dominate trading in interest rate, fixed-income, and equity- and index-based products in Europe.
Given NYSE Euronext's plans to launch a U.S. futures exchange and clearinghouse next month, it puts pressure squarely on Chicago-based CME Group Inc, currently the world's top derivatives exchange operator.
"There's a competitive element to this," Joe Mecane, the chief administrative officer of NYSE Euronext's U.S. markets, said in New York. "Being able to compete with CME ... is an issue in this merger."
CME Group Executive Chairman Terrence Duffy told reporters in Washington his company was ready for the competition. "We positioned ourselves exactly because we could anticipate this coming down the pipe."
There were also questions on the benefits that will fall to shareholders, and how the combined company would distribute its headquarters and executives on the two continents.
The combined group's derivatives unit — the key money maker — will be headquartered in Frankfurt, while New York will get stock trading, two people close to the deal told Reuters. Another source said Paris would handle European equity trading, including what is now done in Germany.
Sandler O'Neill analyst Richard Repetto said he expects a "significant antitrust review" in European futures and cash equity markets, and concerning U.S. equities, as well as debate over sovereign and political issues.
"It will be a perfect test whether the national authorities will be prepared to make concessions on the further globalization of the financial markets," said Susanne Rueckert, a partner and markets specialist at German law firm FPS.
The U.S. Securities and Exchange Commission would have to sign off on the merger, which could also draw antitrust scrutiny from the Justice Department. The U.S. government's Committee on Foreign Investment in the United States could also raise national security concerns.
Deutsche Boerse's formal bid is expected to be announced next week, a source said.
EUROPEANS BUYING NORTH AMERICANS
The Deutsche Boerse-NYSE Euronext news has overshadowed an announcement earlier on Wednesday that London Stock Exchange Group PLC agreed to buy Canadian exchange operator TMX Group Inc.
That transatlantic deal, which would create an operator with a market value of some $6.9 billion, met sharper resistance as Canadian politicians raised questions about sovereignty and whether it would provide a net benefit for the country.
Canada's rejection last year of BHP Billiton's unsolicited bid for Potash Corp weighed on how the London-Toronto deal was put together, sources said.
Interviews with sources familiar with the two takeover deals reveal that fears about political backlash are playing a major role in driving the structure, timing and the choice of partners.
With exchange consolidation back after a few quiet years, competitors around the world were sent scurrying to find partners, accelerating an industry shake-up.
Hong Kong Exchanges and Clearing Ltd was quick to open the door to deals with other players. HKEx, the world's top operator by market value, said it would consider international alliances or partnerships consistent with its focus on China.
Traditional exchanges are under intense cost pressure from upstart electronic rivals such as BATS and Chi-X, which were set up by the world's largest investment banks to loosen the bourses' grip on share trading and to keep fees low.
"This is the start of the endgame," said Ruben Lee of the Oxford Finance Group, which advises exchanges.
"It's hard to see any other major global exchanges being formed," he said. "The only possibility would be some form of Asian bloc but that is still a fair bit away."
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