Merger milestone can be passed with ease

The takeover bid of the NYSE contains a lesson for the exchanges in the UAE that they should speed up their own merger

The proposed Nasdaq/Ice buyout of NYSE will be complex as Nasdaq has a smaller market cap than the NYSE.
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The financial world is following with great interest the US$11.3 billion (Dh41.5bn) bid by Nasdaq OMX and IntercontinentalExchange to take over the NYSE Euronext (NYSE) exchange, improving an earlier bid by Deutsche Boerse of nearly $10bn.

Even though the NYSE board has rejected the bid, Nasdaq hopes the shareholders will overturn that decision. If successful, the Nasdaq-IntercontinentalExchange (Ice) bid will merge the three biggest equity and options exchanges and the 14th-largest derivative exchange in the US to form the biggest exchange in the world for equity and options trading (Nasdaq-NYSE) and the fourth-largest derivative exchange (Ice-NYSE).

There are urgent lessons for the UAE exchanges, which have been discussing a consolidation for some time but are no closer to achieving that important goal. In fact, the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) have much more in common than Nasdaq, Ice and NYSE. The Nasdaq-Ice buyout of NYSE will be more complex than the merger of the ADX and DFM from technical, regulatory and financial perspectives.

Nasdaq has a smaller market cap than the NYSE, and it does not have the ability to absorb the derivatives business of the NYSE, hence its joint bid to take over that business. So in effect, it is a merger of three exchanges, with three different types of trading instruments.

The Nasdaq-Ice offer includes a cash payout to NYSE shareholders and some stock. In our case, the Government owns 100 per cent of the ADX and 80 per cent of the DFM, so reaching a financial offer acceptable to the shareholders while protecting the minority holders would be much easier.

Let us not forget that because of the effects of the financial crisis of 2008, minority shareholders were diluted by more than 75 per cent in some public companies, and some were bought out completely by others without having much of a say. It is believed that the Nasdaq-Ice offer for NYSE was prepared in less than two months.

Here, there has been talk of serious discussions to merge our exchanges for nearly three years, and it is six months since the federal government appointed an international bank to advise on the exchange valuations.

Although the US and the UAE are thousands of kilometres apart, the main reasons behind the American buyout are dwindling revenues and the erosion of margins for the exchanges because of increased competition.

In our markets, trading values since the start of the crisis have dropped from Dh537bn in 2008 to Dh104bn last year, representing a drop of more than 80 per cent.

International investment banks also advised our public companies to list in foreign markets instead of the ADX and DFM. Such a trend strips them of their most prized assets: UAE public companies. The savings and increased efficiency that could be achieved from a merger will definitely help to make our markets much more attractive.

It will be much easier for our exchanges to consolidate and merge their organisational structures than the US exchanges. The DFM completed a similar exercise when it bought Nasdaq Dubai last year.

There is nothing stopping the UAE exchange from having several trading floors, with the main ones in Abu Dhabi and Dubai, and smaller ones in other emirates. The new merged entity would offer equity and options trading - which would be unique for the Middle East and North Africa (Mena) region - together with bonds trading to a lesser extent.

Such a merger would also encourage the development of corporate bond listing on our markets. It would cement the UAE's position as the financial centre of the Mena region in terms of size, regulation and accessibility.

We have passed much bigger challenges in the past in the UAE to reach where we are today. In a country that was united in a federation almost 40 years ago, and that was able to unify all of its government departments, military forces and financial bodies under one nation, so-called "obstacles" to a merger will become only "humps and bumps" on the road to forming one consolidated UAE exchange that is bigger, better and more efficient.

The opportunity must not be lost to achieve a milestone for the UAE financial markets this year. There has already been some remarkable political transformation in our region, so let it be the year the "UAE Exchange" comes into being.

Mohammed Ali Yasin is the chief investment officer at CAPM