NYSE Euronext and Deutsche Boerse Merger Spells Promising Margin Outlook

The new company emerging out of the merger of NYSE Euronext and Deutsche Boerse will likely be incorporated in the Netherlands. Deutsche Boerse shareholders will hold approximately 60% and NYSE Euronext shareholders would hold approximately 40% of the combined company's equity. The combined group is expected to have headquarters in Frankfurt and New York. Deutsche Boerse Chief Executive Reto Francioni will become chairman and NYSE Euronext chief Duncan Niederauer will be the new company's CEO.

NYSE has seen its market share decline over the past few years due to rising competition and increased electronic trading. It has searched for alternative methods of growth and has acquired European electronic exchange Euronext in 2006 to form a combined entity which is now known as NYSE Euronext. Growing competition from electronic exchanges forced the two companies to consider a potential combination of business.

The deal will allow NYSE Euronext and Deutsche Boerse to emerge as the largest player in the derivatives trading market, which is currently dominated by CME Group. The combined entity should also benefit from new regulations that require OTC swaps to go through clearing houses in order to add transparency to the market.

Cost Reduction Should Add Value to NYSE Euronext

NYSE Euronext and Deutsche Boerse AG anticipate that the business merger could generate 300 million euros ($450 million) in cost savings principally from economies of scale in information technology, clearing operations, market operations and corporate center functions.

We expect NYSE Euronext's operating margin in U.S. cash equities to remain in the 11% to13% range during our forecast period. However, should cost savings from the merger push these operating margins towards 20%, it would imply 15% upside to our price estimate for NYSE Euronext's stock. NYSE Euronext's stock price jumped by 14% after the initial announcement of a potential merger with Deutsche Boerse AG on Feb. 9, reflecting a similar expectation from shareholders.

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