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Time to think small in stock-exchange mergers

The global stock exchange merger wave is fizzling out. The European Commission is moving closer to giving Deutsche Boerse's combination with NYSE Euronext the thumbs-down, following on from the collapse of takeovers in Australia and Canada last year. That's tough for bourses grappling with legal changes, upstart rivals and weak markets. But big M&A will now be the exception, not the rule.

Deutsche Boerse and NYSE Euronext may yet prevail. But in order to do so they will have to persuade European states, or competition commissioner Joaquin Almunia, that the continent needs to create its own counterweight to U.S. derivatives powerhouse CME Group

Either way, exchange heads will in future think twice about bids that could inflame politicians or regulators. Last year the attempted takeovers of the Australian and Canadian exchanges, by the Singapore and London exchanges respectively, both foundered on local opposition. And while the U.S. Department of Justice blessed Deutsche's tie-up with NYSE, it blocked a rival bid from Nasdaq OMX and IntercontinentalExchange.

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Moreover, reforms such as Europe's mooted tax on financial transactions and a shakeup of clearing will eat into earnings and could deter less-affected bidders. Exchanges in the most promising countries, such as China, India and Russia, are mostly off-limits for foreigners. And while Hong Kong could use its highly valued stock to buy a European rival, now is hardly the ideal time.

Instead, the focus is likely to switch to smaller deals in promising fields. LSE chief executive Xavier Rolet could find an unencumbered NYSE an unwelcome competitor for two of his current targets, clearing house LCH.Clearnet and the London Metal Exchange. In faster-growing economies, buying small stakes or entering partnerships, as NYSE has done in Warsaw, might allow bigger deals later. Europe's big exchange groups could also consider pooling resources in areas like cash equities, which have been undercut by ferocious competition.

That's not to say there will be no big deals. After all, savings can be huge: One-third of target costs, Berenberg Bank reckons. Revisiting an LSE-Nasdaq combination could make sense if the duo can put bad blood behind them. Still, it's a shift. The sector's short public life – many exchanges only listed in the past decade – has been spent in near-constant bid frenzy. That era may now be ending.

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