Case Study Short Essay Examination Questions

question 98

Essay

Case Study Short Essay Examination Questions

Regulatory Challenges in Cross-Border Mergers

Such mergers entail substantially greater regulatory challenges than domestic M&As.
Realizing potential synergies may be limited by failure to receive support from regulatory agencies in the countries in which the acquirer and target firms have operations.
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European Commission antitrust regulators formally blocked the attempted merger between the NYSE Group and Deutsche Borse on February 4, 2012, nearly one year after the exchanges first announced the deal. The stumbling block appeared to be the inability of the parties involved to reach agreement on divesting their derivatives trading markets. The European regulators argued that the proposed merger would result in the combined exchanges obtaining excessive pricing power without the sale of the derivatives trading markets. The disagreement focused on whether the exchange was viewed as primarily a European market or a global market.

The NYSE Group is the world’s largest stock and derivatives exchange, as measured by market capitalization. A product of the combination of the New York Stock Exchange and Euronext NV (the European exchange operator), the NYSE Group reversed the three-year slide in both its U.S. and European market share in 2011. The slight improvement in market share was due more to an increase in technology spending than any change in the regulatory environment. The key to unlocking the full potential of the international exchange remained the willingness of countries to harmonize the international regulatory environment for trading stocks and derivatives.

Valued at $11 billion, the mid-2007 merger created the first transatlantic stock and derivatives market. Organizationally, the NYSE Group operates as a holding company, with its U.S. and European operations run largely independently. The combined firms trade stocks and derivatives through the New York Stock Exchange, on the electronic Euronext Liffe Exchange in London, and on the stock exchanges in Paris, Lisbon, Brussels, and Amsterdam.

In recent years, most of the world’s major exchanges have gone public and pursued acquisitions. Before this 2007 deal, the NYSE merged with electronic trading firm Archipelago Holdings, while NASDAQ Stock Market Inc. acquired the electronic trading unit of rival Instinet. This consolidation is being driven by declining trading fees, improving trading information technology, and relaxed cross-border restrictions on capital flows and in part by increased regulation in the United States. U.S. regulation, driven by Sarbanes-Oxley, contributed to the transfer of new listings (IPOs) overseas. The strategy chosen by U.S. exchanges for recapturing lost business is to follow these new listings overseas.

Larger companies that operate across multiple continents also promise to attract more investors to trading in specific stocks and derivatives contracts, which could lead to cheaper, faster, and easier trading. As exchange operators become larger, they can more easily cut operating and processing costs by eliminating redundant or overlapping staff and facilities and, in theory, pass the savings along to investors. Moreover, by attracting more buyers and sellers, the gap between prices at which investors are willing to buy and sell any given stock (i.e., the bid and ask prices) should narrow. The presence of more traders means more people are bidding to buy and sell any given stock. This results in prices that more accurately reflect the true underlying value of the security because of more competition. The cross-border mergers also should make it easier and cheaper for individual investors to buy and sell foreign shares.

Before these benefits can be fully realized, numerous regulatory hurdles have to be overcome. Even if exchanges merge, they must still abide by local government rules when trading in the shares of a particular company, depending on where the company is listed. Companies are not eager to list on multiple exchanges worldwide because that subjects them to many countries’ securities regulations and a bookkeeping nightmare. At the local level, little has changed in how markets are regulated. European companies list their shares on exchanges owned by the NYSE Group. These exchanges still are overseen by individual national regulators. In the United States, the SEC still oversees the NYSE but does not have a direct say over Europe, except in that it would oversee the parent company, the NYSE Group, since it is headquartered in New York. EU member states continue to set their own rules for clearing and settlement of trades. If the NYSE and Euronext are to achieve a more unified and seamless trading system, regulators must reach agreement on a common set of rules. Achieving this goal seems to remain well in the future. Consequently, it may be years before the anticipated synergies are realized.
-In what way are these regulatory issues similar or different from those confronting the SEC and state regulators and the European Union and individual country regulators?

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Definitions:

Commerce Clause

A provision in the United States Constitution that grants Congress the power to regulate trade between states, with foreign nations, and with Indian tribes.

Due Process Clause

A constitutional provision requiring that government actions against individuals follow fair procedures, including the right to a fair trial.

Tax

A compulsory financial charge or levy imposed by a government on individuals or entities to fund public services and infrastructure.

Due Process Clause

A constitutional guarantee providing fair treatment through the normal judicial system, especially as a citizen's entitlement.