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The Globe and Mail

NYSE faces tough road alone after merger blocked

The New York Stock Exchange is seen February 9, 2011.


The death of NYSE Euronext's plan to merge with Deutsche Boerse is bad news for investors in NYSE, which will now have to face tough competition and weak markets alone, leading RBC Dominion Securities to slash its ratings on the company's stock.

Analyst Peter Lenardos on Tuesday cut his rating on NYSE shares and dropped his price target by 13 per cent.

Mr. Lenardos now expects the shares to reach $30 in the next 12 months, down from $34.50. He rates the stock "sector perform" instead of "outperform."

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The brokerage is more optimistic about Deutsche Boerse, cutting the price target from to €50 from €53 but maintaining its "outperform" rating. Part of the reason is the expectation of a bigger dividend from Deutsche Boerse.

Deutsche Boerse is more likely to thrive on its own because it is a higher margin business, in part because it has less reliance on trading of stocks, which is a business facing brutal price wars. Deutsche Boerse has a bigger presence in other areas such as derivatives and clearing, where margins are higher. (And which explains why Canada's Maple Group wants to combine the TMX Group , owner of the TSX, with Canada's stock clearing system.) In addition, Deutsche Boerse is a higher growth business and it has a much cleaner balance sheet.

Interestingly, in the context of the TMX-Maple debate over whether that merger involves too much concentration, RBC's Mr. Lenardos argues that European regulators should have allowed the NYSE-Deutsche Boerse deal. He said the regulator focused too much on concentration in the derivatives market, rather than looking at whether that concentration would lead to higher prices.

"In our opinion, ongoing fierce competition and a pricing pledge offered by the merging companies would ensure that price inflation did not occur post merger completion," he said.

That's the argument that Maple is putting forward in response to questions on its plans for pricing in clearing and equities, where it would have high market share should the TMX deal go forward. However, Canadian competition regulators have signalled they still have serious concerns with the plan.

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