NYSE Euronext and Deutsche Börse plan monster merger

NYSE Euronext, the owner of the New York Stock Exchange, and Deutsche Börse are close to proposing to merge and form the world's largest equity exchange. The deal would directly challenge competition authorities and would accelerate the wave of consolidation sweeping across the industry.

Under its terms, Deutsche would pay a premium to subsume its smaller, US-headquartered rival. This would create a behemoth in Europe, combining a majority of the big national equity markets and merging Europe's two big derivatives exchanges. News of the talks came hours after the London Stock Exchange sealed its own merger with the Toronto stock market yesterday, sparking rumours of other deals.

A combination of NYSE Euronext and Deutsche "creates a group that is both a world leader in derivatives and risk management and the premier global venue for capital raising", the two companies said.

Reflecting the advanced nature of the talks, they also revealed details of the price of the deal and management structure they are planning. Deutsche Börse's shareholders will own 59 to 60 per cent of the combined company, with NYSE Euronext investors owning 40 to 41 per cent, a little more than they would get in a no-premium merger of equals.

Bringing together Euronext, itself a network of European stock exchanges, with the largest remaining independent equity market in continental Europe, would give the new company a dominant position in equities, but it is the derivatives trading side of the business that now has the strongest growth prospects.

Equities trading has fragmented among a large number of smaller, electronic trading platforms, but derivatives exchanges are expecting to win new business from regulatory rules imposed in the wake of the credit crisis, which will push derivatives trading on to formal exchanges or through central clearing houses.

In the last wave of exchange consolidation, the NYSE merged with Euronext in 2007, partly to get control of Liffe, formerly the London International Financial Futures and Options Exchange. Deutsche Börse owns Eurex. The third of the world's "big three" derivatives exchanges is the CME Group, based in Chicago.

Investors sent shares in other derivatives exchanges soaring. Shares in CBOE Holdings – owner of the Chicago Board Options Exchange, the world's largest options exchange – leapt by 12 per cent. And NYSE Euronext's stock surged by 16 per cent, despite warnings from management that the deal had not yet been finalised and from analysts that it faced major competition hurdles.

The effective takeover of the New York Stock Exchange by a European owner could stir political controversy in the US, and the dominant position the combined group will have in Europe is also sure to be a concern.

Ed Ditmire, an analyst at Macquarie Securities, said: " It would be complicated – there would be competition concerns, a list of regulators with a purview over one or the other of these businesses as long as your arm. It would be a relatively challenging one in terms of the typical exchanges hurdles of nationalism. I don't think a deal of this nature is one that would likely be struck or closed quickly."

The combined group would have dual headquarters in New York and Frankfurt, the companies said last night. The chairman would be Reto Francioni, now boss at Deutsche Börse. Duncan Niederauer, the chief executive at NYSE Euronext, would take that title in the new company.