Deutsche Boerse dropped a $10 billion bid for Euronext on Wednesday, dashing French and German hopes for a European mega-exchange that would put Euronext beyond the reach of the New York Stock Exchange, according to Reuters. The collapse of proposals backed by French President Jacques Chirac and German Chancellor Angela Merkel is good news for Euronext, which has opted to merge with NYSE, but it coincided with plans by top banks to leapfrog the exchanges with a new market. Traditional financial exchanges on both sides of the Atlantic have been in frenzied merger negotiations for the past two years amid pressure on costs and new European rules allowing banks to trade stock directly with each other. The management of Euronext, which runs the Paris, Amsterdam, Brussels and Lisbon stock exchanges, has repeatedly rebuffed Deutsche Boerse in preference for an agreed bid from New York Stock Exchange operator NYSE Group Inc.. Deutsche Boerse said in a brief statement it would "stop all preparatory steps including the regulatory and merger control processes". The announcement confirmed comments on Tuesday from sources close to Deutsche Boerse that the exchange was seriously considering dropping the bid. "They were never going to win but now will have to tie up with maybe the Scandinavian or southern European exchanges," said one analyst who declined to be named. Deutsche Boerse's withdrawal coincided with a deadline for it to submit remedies to the European Union Commission to address competition issues raised by a Franco-German deal. Euronext declined to comment on Deutsche Boerse's decision, which derailed plans for a pan-European securities trading group, an idea cherished by many in continental Europe's financial industry as well as monetary policymakers and politicians. Europlace, a powerful French financial lobby, said it was sorry that Deutsche Boerse did not discuss a proposal, made in a report commissioned by Europlace, to merge only the two groups' cash equity trading business. Euronext had welcomed the Europlace proposal but said such a deal would be done in parallel to its merger with the NYSE. Deutsche Boerse said a trilateral deal was not an option. Shares in Deutsche Boerse closed 4.6 percent lower, while Euronext's were down 5.4 percent. Both stocks have nearly tripled in value in the past year on bid speculation. Dealers said the shares were rattled by the setback for European consolidation but added that a bigger factor was concern that the investment banks' plans for a rival pan-European exchange would take away market share. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS said in a statement they would form a new company with an independent management team to create a pan-European equity trading platform next year. "It's an open secret banks have been extremely unhappy about costs of dealing," said Richard Murley, managing director at UK investment bank Rothschild and former head of the UK Takeover Panel. "It's a pretty serious opportunity. The real question is whether they can attract the liquidity," Murley told the Reuters Investment Banking Summit in London. Dealers and analysts said the banks' move was a tactic to force the London Stock Exchange and others to lower their fees. Fees are also likely to come under pressure with an expected increase in competition when the European Union's new Markets in Financial Instruments Directive (MiFID), which aims to open up crossborder European trading in financial markets, takes effect in a year's time. Andrew Mitchell, an analyst at Fox-Pitt, Kelton, said the venture was potentially a serious threat to the main equities exchanges in Europe. In September, a grouping of the same seven investment banks plus ABN AMRO and HSBC said it was considering setting up its own system for reporting share trades, bypassing major European bourses. But the banks have a challenge on their hands, given that previous attempts to create rival exchanges, such as Nasdaq Europe and Jiway, have failed, analysts said. "Their ability to succeed depends on the strength of the common threat that they face," said Jim Gollan, chief executive of virt-x, a crossborder exchange owned by the SWX Group, which operates the Swiss exchange. "The banks are concerned that the for-profit exchanges charge too much." "The situation has got truly out of control. Volume has increased dramatically; at the same time our business is becoming a much lower-margin business. The economic pain is acute," said a banker from one of the investment banks in the group who declined to be named. "There is a collective will to own what we regard as a utility business," he added. "And developments in technology have made what was once a difficult and expensive design problem much easier." No one was available to comment on the matter at the London Stock Exchange, a long-running bid target whose shares rose last week on speculation that a new bid was imminent -- possibly from major shareholder Nasdaq Stock Markets.
