Exchanging value

Deutsche Boerse/NYSE calculator: There’s a puzzle in the planned union of the New York and Frankfurt stock exchanges. Under the mooted terms, Germany’s Deutsche Boerse pays a premium to NYSE Euronext, even though its US rival’s chief executive gets to run the enlarged group. The proposed division of the spoils only becomes fairer if cost savings from the deal are higher than initially expected — or if one assumes that the German exchange was overvalued to begin with.

On the numbers disclosed so far, the deal looks so-so for Deutsche Boerse. It gets 59 to 60 per cent of the enlarged group, in spite of accounting for 64 percent of its combined value based on market capitalisations on February 8 — the day before the two companies admitted they were in talks.

The synergies — euro300 million ($404 million) annually before tax — mean Deutsche Boerse can afford this modest transfer of value and still be better off. When taxed, capitalised and adjusted for one-off costs, these savings are worth about $2.5 billion. Deutsche Boerse shareholders capture about $720 million of this value — a 5 per cent premium to the group's undisturbed market capitalisation. But NYSE Euronext shareholders do even better. They get about 72 per cent of the value created — equivalent to a 20 per cent premium.

If the synergy figure turns out to be conservative, however, the split will change. Because Deutsche Boerse shareholders have a majority of the combined group, they get more of any unexpected upside than NYSE shareholders. Given the tendency of merging companies to set deliberately low cost saving targets, this is a distinct possibility.

But even then, this would only be a mitigating factor. Even if the cost savings turn out to be twice as big as forecast, NYSE shareholders would still capture more than half the value created.

The other justification for Deutsche Boerse’s shareholders to accept the terms would be if the exchange was overvalued going into the deal. That may be the case: after all, NYSE Euronext is a mature cash equities exchange, while Deutsche Boerse’s derivatives business has enjoyed rapid growth.

But if Deutsche Boerse is already fairly valued, and the stated synergies are about right, it has some explaining to do.