Just about a month after NYSE Euronext Inc. (NYX) and Deutsche Boerse AG announced to merge in a $25 billion deal, yesterday the European Union (EU) Commission in Brussels elucidated on the delay of the deal, on grounds of regulatory hurdles that the deal is going to face in the process of an intense reviewing.
The EU’s antitrust commissioner specified that the deal is subject to in-depth probing since the business of both NYSE and Deutsche Boerse are operated as per vertical silo model. The vertical silo model refers to an exchange that manages both the derivative trading and the clearing of such transactions.
Such a model is supposed to be anti-competitive as it could give exchange operators the authority to keep lucrative contracts and revenue for themselves, thereby tailing out competition from the market.
Moreover, with very less overlapping of services, the NYSE-Deutsche Boerse deal is expected to cover 90% of the market share, with almost four times the revenue of the London Stock Exchange or NASDAQ OMX Group Inc. (NDAQ).
Based on 2010 net revenues, the prospective merger will earn approximately 37% of total revenues from derivatives trading & clearing, 29% in cash listings, trading & clearing, 20% in settlement & custody and 14% in market data, index & technology services, and thereby providing ample scope for a monopolistic model in future.
As a result of this issue, the antitrust commission in EU expects to take up even the phase II of the regulatory probe. While the first phase takes at least 25 working days, the second phase takes additional 90 working days under the stated EU rules. However, speculation also reveals that it would take about a year’s time for the inquiry to be fully completed.
Not only the EU but the US government is also working on a financial overhaul system to mitigate another global financial crisis in future. Further, the in-depth probe has become even more crucial, now that most of the economies have just come out of the global financial crisis and intends to operate in a clean and healthily competitive business environment.
Hence, the EU antitrust commission has started to probe into the matter and expects to come out with a viable solution that could include clearing an operation or set conditions such as the selling of some assets, in order to solve competition concerns.
Additionally, a blockage of the deal is also possible, if the companies involved do not commit to solve these concerns, although such a scenario is an unusual one.
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