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Why Merging Won't Rejuvenate Old-Guard Exchanges Like the NYSE, Deutsche Boerse

If Deutsche Boerse and NYSE Euronext can settle on a price and get governmental approval to merge, the company would be the largest stock market in the world. And chances are the deal still ain't gonna work.

Safe prediction, I know. Most mergers fail. And the odds generally diminish according to the number of miles, languages and cultures separating the companies joining forces. As usual, it's also not clear how uniting two struggling rivals being run ragged by spritely new competitors solves the German and U.S. exchanges' two major problems: They're big and they're old.

These companies are essentially no different than any other dominant player in a rapidly changing business. If anything, they've arguably overstayed their welcome, controlling the financial markets as much through a combination of historical and geographical circumstance as through their prowess.

Not that there aren't advantages to size and maturity -- just ask GE. And it's worth noting that traditional stock markets like the Deutsche Boerse, NYSE and London Stock Exchange retain significant competitive advantages. But when the winds of change come howling through an industry, those strengths can quickly turn against you.

Newer, faster, cheaper
Indulge me as I cite one of my favorite windbags -- me -- in explaining why these companies are hooking up: technology, consolidation and Asia. First, they're being disrupted like mad, shoved aside by the emergence of faster and cheaper places to trade. Despite their best efforts, traditional markets have fallen behind the technological curve in recent years, as algorithmic trading fundamentally changes an exchange's relationship with their customers. The bottom line is that global capital just doesn't need them as much as it used to.

Second, as former NYSE director Ken Langone (and Home Depot co-founder) told CNBC, their market share is falling faster than their costs. When that happens, the usual play for companies is to seek "efficiencies." But as everyone knows, cutting costs is a poor way to grow your business.

Third, since the financial crisis money has sloshed over to the eastern side of the globe. As the adjoining chart shows, that has dramatically changed the balance of power among the world's top exchanges (click to expand). When trading revenue growth was falling off a cliff in Europe and the Americas in 2008, it was rebounding strongly in places like Tokyo, Kong Kong and Singapore. So U.S. and European markets are seeking in scale what they can't attract in new business. Their strategy -- hold the line until the earth tilts back toward their side of the water.

Don't just stand there!
A related reason these exchanges are pairing up is that their leaders are under pressure to do, well, something to halt the slide. Since NYSE first announced the company's intention of merging with Euronext in 2006, its stock price is down more than 60 percent. As shareholders and corporate boards get antsy, that often means one thing: merge.

Of course, it's by no means certain that Deutsche Boerse and NYSE will clinch a deal. The teeth-gnashing in New York has already begun. It remains to be seen how powerful lawmakers like Charles Schumer, D-N.Y., aka the senator from Wall Street, will react to what some critics will inevitably decry as a European power play.

But if the companies pull it off, expect to hear lots of talk about the companies forming the first truly global marketplace. The word "liquidity," and its many benefits for investors and stock issuers, will figure prominently in the flag-waving, as will the numbers 24 and 7. The companies will tout their synergies, singular vision and world-class management. But my guess is that in a few years time, Deutsche Boerse NYSE Euronext will be exploring an even more spectacular merger with the likes of the London Stock Exchange TMX Group.

Image from Bouke via Wikimedia Commons, CC 3.0; chart courtesy of Hong Kong Exchanges and Clearing
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