Anticipated merger between NYSE Group, Inc. and Euronext N.V.

Affected market: Activities of stock exchanges

No. ME/2485/06

Please note that the full text of the decision can be downloaded from the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 9 October 2006. Full text of decision published 12 October 2006.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

NYSE Group, Inc. (NYSE) is a publicly-listed holding company formed on 2 May 2005. NYSE operates the New York Stock Exchange and another U.S.-based securities exchange, NYSE Arca, via subsidiaries. NYSE's total revenue attributable to UK customers was approximately £[ ] in 2005.

Euronext N.V. (Euronext) was formed in September 2000 by the merger of the Amsterdam, Brussels, and Paris stock exchanges. Euronext has since expanded through acquisition to include the Portuguese stock exchange, the London-based derivatives exchange, London International Financial Futures and Options Exchange (Euronext.liffe), and a stake in MTS SpA, an electronic market for European wholesale fixed income securities. Euronext achieved turnover in the UK of approximately £[  ] million in 2005.

TRANSACTION

Euronext and NYSE have agreed to combine the two companies in a merger of equals pursuant to a Combination Agreement. Upon completion, NYSE and Euronext will each become subsidiaries of NYSE Euronext Inc., a Delaware holding company (NYSE Euronext, or the merged firm). The transaction is subject to shareholder and applicable regulatory approvals.

JURISDICTION

Neither of the merging parties will continue to be carried on under the same ownership or control. The parties will thereby 'cease to be distinct' for the purposes of section 26 of the Enterprise Act 2002 (the Act).
 
In the context of this transaction, both parties' turnover in the UK must exceed £70 million to qualify as a relevant merger situation pursuant to section 23(1)(b) of the Act. As NYSE's relevant turnover falls well short of that level, the turnover test is not met.

However, the share of supply test, set out in section 23(4) of the Act, is met in respect of the supply of secondary listings services to UK companies:

• Supply of secondary listing services. The supply of such services, described in more detail in the full text of the decision, constitutes a reasonable description of supply under section 23(4) of the Act.
• Supply in the UK. Services are supplied in the UK to customers who are located in the UK. That is, in most circumstances, where the deal is made, where the turnover for the supplier in question is generated, and where competition with alternative suppliers takes place.  Customers of secondary listing services will almost invariably be multinational companies. The OFT considers it reasonable to regard secondary listing services as supplied in the UK where the companies concerned have their head office in the UK, since, in most circumstances, that is where the relevant procurement decision is likely to be taken, owing to its strategic nature and where, in turn, any competition between suppliers takes place. (see note 1)
• Share thresholds. As a convenient proxy, the OFT has had regard to data from the parties on the total number of secondary listings by all companies incorporated under UK law. (see note 2) The parties' combined share of supply is [greater than 25 per cent].

Notwithstanding the parties' submissions, (see note 3) therefore, the OFT considers that the parties overlap in a relevant share of supply in the UK, and that their combined share exceeds 25 per cent. Nor does the OFT's assessment of market definition or competitive effects affect the validity of conclusions as to its jurisdiction. Accordingly, the share of supply test is met and the OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
 
The parties have informed the OFT that the EC Merger Regulation does not apply, and that, worldwide, the transaction will also be notified for merger clearance in Portugal.

THIRD PARTY VIEWS

The OFT received a number of responses from third parties, most of whom had no specific competition concerns and/or thought that the proposed transaction could increase competition between stock exchanges in Europe.

Some third parties did raise concerns about the merger. One third party raised specific competition concerns, each of which is discussed in the decision (i.e., the merger effect on primary international listings, and the reduction of the number of potential competitors to LSE in respect of the trading of equities in the UK). Other third parties raised general concerns, including the fact that the proposed transaction would lead to general consolidation in the industry, the possibility of regulatory encroachment by U.S. authorities in relation to European listings, potential disadvantages arising from the migration of NYSE's/Euronext's systems, future changes to clearing and settlement arrangements, and the need for effective governance and regulatory controls to continue. However, as these concerns fall outside the competition assessment of the proposed transaction, they are not considered in this decision.

ASSESSMENT

The proposed transaction will lead to the merger of Euronext and NYSE, two of the leading stock exchanges in Europe and the U.S., respectively.

On the weight of the evidence, the OFT concludes that no material merger effects will arise in the UK in respect of bonds, derivatives, clearing and settlement and information. The OFT therefore focused its investigation on the listing and trading services, where certain third parties had raised competition concerns.

In relation to listing services to UK issuers, the OFT rules out concerns in relation to primary listings, for which neither party is a material actual or potential competitor to the LSE.

In relation to secondary listings for UK issuers, the OFT concludes that, while there is an international component to choosing a secondary listing venue, this does not imply direct competition between Euronext and NYSE. On the contrary, the evidence available to the OFT confirms that the parties are not material competitive choices for UK customers, who choose to list on either party for idiosyncratic historical or commercial reasons, and not to access international capital based on competitively-determined listing terms and conditions set by either merging party.

In relation to primary international listings, the OFT concludes that, while Euronext and NYSE might compete for primary international listings from non-UK issuers, this competition does not take place in a market in the UK and does not otherwise materially impact upon UK customers or consumers. Any possible merger effects in this respect are therefore extra-territorial and outside the scope of the SLC test in section 33 of the Act.

In respect of the horizontal effects of the merger on on-book equities trading in the UK, the OFT concludes that the entry threat of organic entry posed by each party absent the merger is at best uncertain, and in any event the merger of the parties to form one larger potential entrant, NYSE Euronext, does not materially lessen the threat posed towards the LSE, and if anything increases it. Accordingly, the LSE's trading customers are not put in a materially worse bargaining position vis-à-vis the LSE than absent the merger. This holds true irrespective of the degree to which Nasdaq is or will remain a potential entrant into UK equities trading.

The OFT also concludes that there are no merger effects in respect of any other aspect of the UK equities trading chain, including no material change in the ability or incentive of the parties to raise barriers to entry and foreclose rivals at any level.

Overall, third party responses were generally supportive of the merger, although one third party did raise concerns regarding the effect of the merger on primary international listings and equities trading in the UK, particularly given Nasdaq's stake in the LSE. These concerns are dealt with in more detail above. Other third parties expressed certain general concerns regarding the proposed merger, but these were outside the scope of competition concerns under the SLC test in section 33 of the Act.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. Compare the Commission Notice on calculation of turnover under Council Regulation (EEC) 4064/89 on the control of concentration between undertakings, OJ C66 2/3/98 at p 25, para. 46; compare also Draft Commission Consolidated Jurisdictional Notice under Council Regulation (EC) 139/2004 the control of concentration between undertakings, available at http://ec.europa.eu/comm/competition/mergers/legislation/jn.pdf, paras.165, 168.
2. This is a close but not perfect proxy: it is possible that secondary listings competition for a minority of customers with an atypical profile – for example, incorporated in the UK for tax reasons but having no strategic operational presence in the UK – may take place purely abroad. However, it would be impractical in the present case to verify individual company facts to this degree of detail, and the parties have treated companies incorporated under UK law as 'UK customers' in their submissions. The OFT therefore regards the data available as a reasonable proxy for establishing that the share of supply test is met in the circumstances of the present case.
3. The parties had submitted that the share of supply test was not met, but accepted the OFT's adjudication, as outlined above, for the purposes of the inquiry leading to this decision.

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