Something or nothing

Battle for NYSE: Nasdaq OMX boss Robert Greifeld faced a tough choice as rivals merged around him: compete, but put his shareholders and his balance sheet under strain; or forgo the chance and be forgotten on the sidelines. He has chosen the former - teaming up with IntercontinentalExchange (ICE) to make an $11.3 billion cash-and-stock counteroffer for NYSE Euronext that trumps Deutsche Boerse's bid by 19 per cent.

It's a punchy move on Nasdaq's part. For starters, if successful, Greifeld would need to sell 106 million new shares to fund the rest of his side of the bid. That dilutes current stockholders by a whopping 60 per cent.

The deal would also breach the exchange's credit covenants, taking its debt multiple to 3.34 times last year's combined earnings before interest, taxes, depreciation and amortization. It's not worryingly above the three times Ebitda ratio it had in place, and clearly its lenders have agreed to waive the restriction. But Nasdaq's number also bakes in all cost and revenue synergies, which will take three years to materialize. And rating agencies are already warning of downgrading Nasdaq's debt if its bid is successful.

But the deal has been structured well enough to offer some appeal, too: NYSE shareholders would get both a decent premium to the German exchange's offer and take some of that in cash. They would also end up owning a slug of ICE, a pure-play, higher-growth derivatives exchange that boasts a multiple of 22 times this year's earnings. Nasdaq and ICE reckon they can eke out more synergies than Deutsche Boerse - currently worth some $3 billion to Nasdaq investors alone, once taxed, discounted and capitalized. And, Greifeld has a good track record.

But while success would turn Nasdaq into the dominant transatlantic stock market, it would also consign the bourse to the lower-growth, lower-multiple equities business: pure play derivatives exchanges probably wouldn't be interested in dumbing down their own multiples with a merger, and growing that business organically is a slow process.

US regulators might not even approve the deal - they have not looked kindly on a Nasdaq-NYSE tie-up in the past. But doing nothing would have given Deutsche Boerse a free pass in Nasdaq's backyard. And, it would have consigned Greifeld to relative obscurity. If nothing else, making the offer at least allows him to show he tried.