So NYSE Euronext and Deutsche Börse may merge, with the latter being the acquirer. It's a deeply symbolic moment. The NYSE is America's oldest and most famous stock market. Until recently, all US public companies aspired to a NYSE listing (it wasn't until tech companies made NASDAQ sexy that that changed). And now it's going to be owned by the Germans. (Don't mention the war.)
Why? The WSJ blames the deal on the declining competitiveness of US capital markets in the face of excessive US regulation:
In the early 1990s, American exchanges played host to half of the world's new public companies. Last year, according to Dealogic, U.S. exchanges hosted 171 initial public offerings worth a total of $45 billion. But this U.S. deal-making was dwarfed by the action overseas, where 1,295 companies went public with a total value of $237 billion. The iconic NYSE now lags behind two Asian exchanges in IPO volume. This is partly the result of more rapid growth in developing economies, but it used to be that foreign companies wanted to float their shares in the U.S. Now they're as happy in Hong Kong.
U.S. over-regulation is certainly to blame here, especially the 2002 Sarbanes-Oxley law and its multimillion-dollar compliance burden on public companies. The Securities and Exchange Commission's own exhaustive 2009 survey of U.S. and foreign firms showed that the burden of complying with Sarbox remains a major deterrent to going public in the United States. Yet the agency still hasn't made a serious effort to pare these burdens.
If the merger proceeds, the temptation in Washington will be to fret about foreign ownership of U.S. financial assets. But far more constructive would be some reflection about Washington's contribution to sending these assets and trading offshore. The Dodd-Frank law requires mountains of new rules that will further burden U.S. financial players, not least in the new derivatives regime emerging from the Commodity Futures Trading Commission. We would not be surprised if the NYSE Euronext managers view the Deutsche Börse merger as a potential refuge for its derivatives business if CFTC Chairman Gary Gensler realizes all of his regulatory ambitions.
For most of the last century, America could count on the size of its economy and quality of its technology to give it a competitive edge. No more. If we want the U.S. to be home to the next great financial institution, or even to keep the ones we have, our politicians need to make America a more inviting place to trade and do business.
I certainly don't deny that US capital markets are less competitive globally than they used to be. To the contrary, I wrote in my article Corporate Governance and U.S. Capital Market Competitiveness that:
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position.
Having said that, however, it's important to remember that there is another factor in play; namely, markets around the world are maturing. All around the globe, there are capital markets that are gaining the size, liquidity, transparency, and credibility to compete effectively. The US no longer has a monopoly on those characteristics.
In this new environment, consolidation is the name of the game. After all, this week also saw the announcement that the London Stock Exchange and the Toronto Stock Exchange had reached a deal to combine. As a result:
For years, the watchword within the sector has been that bigger is better, in terms of both scale and services. The big exchanges like the New York Stock Exchange and the Nasdaq have been moving away from the simple listing and trading of stocks into more lucrative areas like futures, options and derivatives trading. And once their operators have hit the break-even point after building out their platforms, every additional dollar is largely profit. ...
Among the main considerations for the exchanges is the kind of growth they should seek through a deal. Gaining access international markets — especially Asia and Latin America — is considered a high priority, as is increasing market share in higher-margin businesses like derivatives trading.
So this deal likely is more about market forces than regulatory restrictions (which is not to say that the latter aren't a factor to some extent).
So, yes, the sale of a proud American institution is a symbol. But of what?
I am reminded of the nationalist panic back in the 1980s when the Japanese bought up a slew of American icons, like Rockefeller Center. Many Americans saw that as a symbol of American decline. But within a very few years, Japan entered its lost decade and the Japanese firm that owned the Center went bankrupt. Meanwhile, the US entered a period of growth and prosperity.
Just as proved to be the case with the Rockefeller Center, the sale of the NYSE likely is a symbol that we live in a global market and that we have assets foreigners crave. And that's no bad thing.
Update: Speaking of nationalist outrage, the WSJ's Deal Journal blog found some:
Knee-jerk nationalism has been relatively muted toward the proposed merger of the New York Stock Exchange and Germany’s Deutsche Börse, a deal in which the Germans would come out on top.
But John Whitehead, the former co-chairman of Goldman Sachs Group, thinks the deal is “a terrible idea,” according to Bloomberg News. “It would be an insult to New York City, and New York State, and indeed to all America.” ...
... The German exchange isn’t majority owned by Germans, and the merged company is expected to have dual HQs in Frankfurt and New York. Still, some American stomachs have churned at the thought of a German company taking over the iconic New York Stock Exchange–a “citadel of American capitalism,” as the Journal called it.
If Whitehead was Canadian, would he be insulted by the LSE's purchase of the Toronto exchange?
