23 February 2012
On February 1 2012 the European Commission adopted its decision prohibiting the $10.2 billion merger between Deutsche Börse and NYSE Euronext. The decision is notable not least because it is rare for the commission to block a merger. Of the 4,857 merger transactions that have been notified under the EU merger control regime since its inception in 1990, only 21 have been blocked.
Companies, markets and position
The main issue in considering the transaction was the effect that it would have on the worldwide market for European financial derivatives (ie, European interest rates, single-stock equity and equity index derivatives) traded on exchanges.1 The commission found that the merged entity would have held 90% of the shares on this market.
The parties argued that the market also covered non-European financial derivatives as well as derivatives traded outside of stock exchanges (or over the counter). The commission nonetheless found that exchanges for derivatives based on European underlyings could be separated from other derivatives. In regards to trade outside of stock exchanges – considering that trades on over -the-counter exchanges are 200 times higher in value on average, in addition to being more risky and customised when compared with exchange derivatives – they were not considered substitutable by consumers, and as such could be excluded from the market. According to the commission, in this market for exchange derivatives based on European underlyings, Eurex (Deutsche Börse) and Liffe (NYSE) are the two largest exchanges in the world and are each other's closest competitors. The competitive pressure exerted by one on the other was considered strong, with customersthreatening to switch to the other exchange, which in turn has previously led to lower fees. This raised competitive concerns that the parties failed to address, according to the commission.
Most mergers that involve more serious competitive concerns are usually approved after the parties submit remedies to solve the problems that the merger could potentially create. Such remedies are usually divestitures of branches, participations or assets, or behavioural commitments.
In the present case, the parties offered three commitments as a remedy:
- divestment of part of Liffe's European single stock derivatives business;
- access to the merged entity's clearing house for materially 'new' interest rate, bond and equity index derivatives contracts; and
- licences to Eurex's interest rate derivatives trading software.
An informal remedy was apparently also discussed in the course of proceedings, relating to the public commitment of the merging parties not to increase their prices for three years.
The commission did not consider that the remedies were fully responsive to the competition concern, as they were either too limited or hard to implement or to monitor. It appears that the commission wished for either one of Eurex's or Liffe's exchanges to be fully divested, which both parties considered as contrary to the economic rationale of the transaction.
Blocked mergers: a rare occurrence
Since the origin of the EU merger control regime, there have been only 21 formal decisions adopted declaring a proposed merger incompatible with the internal market and thus prohibited, as opposed to the several thousand that have been consented to, most of them unconditionally. Over the past seven years, only two other mergers have been blocked, both of which were mergers between airline operators from the same country (Ryanair and Aer Lingus for Ireland and Olympic and Aegean for Greece) – which can be seen as likely candidates for a prohibition decision, particularly in light of previous airline merger decisions.
There is little doubt that the commission decision blocking the merger, while the US Antitrust Division of the Department of Justice authorised it under conditions, will resurrect the issue of consistency when global mergers are at stake. The same issue arose at the time of the proposed General Electric/Honeywell merger, but the Deutsche Börse/NYSE case is the first case raising such issues to be blocked since the introduction of the latest EU merger regime and the creation of the International Competition Network.
However, in the present case, due consideration must be given to the fact that the authorities looked at different markets. US authorities focused on issues on the US markets and most notably addressed these by authorising the merger with remedies in the US cash equity market – namely, by providing for the sale of Deutsche Börse's stake in the fourth largest stock exchange in the United States, Direct Edge. While a transaction that is conditionally cleared in the United States but blocked in the European Union is an uncomfortable prospect in terms of business planning, this is an unavoidable risk when it comes to multi-jurisdictional filing in order to respect the territoriality principle.
Merger decisions must be taken collectively by the EU College of Commissioners. It is the normal rule that the college follow the assessment of the commission's competition department and competition commissioner and validate the decision without question.
After the commission had set out its concerns about the merger in a statement of objections, the parties launched a series of public statements. They also presented the 'European champion' argument, but this rarely appears convincing in the context of a competition analysis, even in a college decision where some commissioners might be persuaded at least to consider policy arguments that go beyond competition. However, in the last days preceding the deadline for decision, a notable event was the 'reserve' expressed by Commissioner for the Internal Market Michel Barnier, who publicly stated that he would need more time to assess the dossier for scheduling reasons. Considering the importance of the financial sector to the commissioner's mandate and in light of the regulatory framework and foreseen or considered reforms and developments in this area, having a single strong entity on the stock exchange might be considered helpful for policy reasons (eg, stakeholder dialogue and monitoring). While the parties claimed to have the support of a certain number of member states and commission officials, it is not publicly known whether there was any opposition to the decision among the commissioners, as the commissioner responsible for competition policy refused to comment on that point in a speech he gave on the decision, simply stating: "What I can say is that we didn't vote."
(1) A derivative is a financial contract whose value is derived from an underlying asset.