Insights from creating the world's largest exchange

Two months after announcing that NYSE Euronext had agreed in principle to be acquired by German exchange operator Deutsche Börse for $9.7 billion, NYSE Euronext senior vice president and corporate secretary Janet McGinness and her legal team were faced with the possibility of the deal falling apart. In April, NASDAQ OMX and IntercontinentalExchange (ICE) made a competing bid of $11.3 billion to acquire the 219-year-old New York exchange in a brazen attempt to steal the deal.

The merger was the deal of a lifetime, creating the largest stock market in the world, with $20 trillion in annual trading volume. All the work that McGinness, NYSE Euronext group executive vice president and general counsel John Halvey and the legal team had put into executing the right strategy and filing the necessary paperwork with the proper regulatory agencies was suddenly at risk of being undone by a last-minute flash of cash.

Ordinarily a company would be thrilled to have other firms step in and drive up its sale price for a better payout for shareholders, but there was more at stake than the nearly $2 billion that separated the two bids – McGinness and her team were more concerned with making sure that NYSE Euronext was acquired by the right partner for its long-term success as an exchange. The prospective buyer’s strategy for company expansion and future revenues was, therefore, considered more valuable than the cash value of the offer.

Winning over investors

Convincing investors that it was in their best interests to accept the original lower-priced all-share offer from Deutsche Börse over the counter-offer of shares and cash from NASDAQ and ICE is where the behind-the-scenes work of the corporate secretary really paid off. Overseeing the preparation of the NYSE Euronext management team to make the case for going forward with the original deal was one of McGinness’ (pictured left) primary responsibilities during the tense weeks after the competing proposal was announced.

‘We developed a strategic vision two years ago and every decision we made was tied to the question, Is that still the right strategy?’ McGinness recalls. ‘We were constantly testing it – constantly trying to look at transactions through the lens of that vision – and the management team here did a fabulous job, so that when we got to the point of actually deciding to pull the trigger with Deutsche Börse, the board really understood the entire competitive landscape.’

McGinness’ team’s calculation that merging with Deutsche Börse would be a competitively superior choice to joining with NASDAQ/ICE ultimately won the negotiations. As analysts argued over the merits of both proposals, the NYSE Euronext board never wavered from its initial decision. McGinness says the reason the board stuck to its guns even though members knew the company could be sued by shareholders who favored the higher offer was because board members were given detailed market research and thorough risk analysis on the deal that were impossible to ignore.

‘The board really felt very strongly that this was the right decision – the right strategic move for the company. They had absolute commitment to the vision that Duncan [Niederauer] and his team laid out, and as a result of that, they were very firm in rejecting the NASDAQ proposal multiple times, and with intense investor pressure,’ says McGinness.

‘Because we had laid such tremendous groundwork for them, our board members had the courage of conviction that they were doing the right thing – and for me that has been the most important contribution that my team and this management team have made to the merger.’

The merger will combine stock exchanges in New York, Frankfurt, Paris, Brussels, Amsterdam and Lisbon with the Eurex derivatives platform to create the largest stock exchange in the world. The strategic value of merging with Deutsche Börse is being supported by industry analysts. Zacks Equity Research estimates that based on 2010 net revenues, the new company will earn about 37 percent of its total revenue from derivatives trading and clearing, 29 percent from cash listings, trading and clearing, 20 percent from settlement and custody and 15 percent from market data and index and technology services. Zacks also estimates the company will save $580 million in cost synergies and generate $218 million in revenue synergies.

In a recent analyst’s note, Morningstar equity analyst Michael Wong says NYSE Euronext is showing its ability to expand into new territories even as the merger is pending. ‘NYSE continues to grow its technology business with the announced acquisition of Asian market access provider Metabit and the launch of its cloud platform, the Capital Markets Community Platform. The company is still aiming for $1 billion of revenue from its information and technology services segment by 2015 with 25 percent to 30 percent operating margins,’ he writes.

A really big deal

The merger, which is expected to be complete by the end of the fourth quarter of 2011, still has regulatory challenges to overcome. While shareholders of both companies have approved the deal and regulators in the US have also given the OK, the European Commission (EC) has launched an extensive antitrust probe.

EU competition commissioner Joaquín Almunia highlighted the regulator’s primary concerns in a statement issued in August, saying: ‘The proposed merger would remove a strong competitor from the market and would give the merged company by far the leading position in derivatives trading in Europe.’

NYSE Euronext chief executive Duncan Niederauer downplayed concerns about competition in an August conference call with analysts. ‘It's important to note that any negative impact on competition is not significant given the global nature of derivative markets, the increasing competition between OTC-enlisted markets generally and in derivatives specifically, and the simple well-known fact that [NYSE Euronext and Deutsche Börse] don’t really compete against one another,’ he said. ‘The only area of overlap in our current business models is in some single-name derivatives, and, of course, we are only two of many players in those markets.’ He also predicted that the EC’s focus ‘will be on what conditions may be placed on us, not how to make or break the deal.’

The EC says it will make a final decision on the deal by December 13.

Corporate secretary and more

Until final approval by the EC, McGinness will continue to support the general counsel as he advises the board. But playing a supporting role in getting this historic merger approved is not the only important contribution she makes to NYSE Euronext. As corporate secretary, McGinness is in charge of relationships with the board. She is the primary adviser to the board’s audit committee, the compensation committee and the nominating and governance committee. She is also in charge of all securities reporting.

‘I do all of our SEC reporting and I oversee any reporting we would need to do from the European perspective because we are dually listed on the Paris exchange and the NYSE,’ she says.

Additionally, McGinness works on all investor relations filings, earnings releases and earnings calls. She is often involved with what she calls ‘high-level PR, marketing and branding.’ And if that’s not enough, she must also advise three subsidiary boards, including the NYSE regulations board, the NYSE Euronext US futures exchange board and the NYSE AMEX options board and their outside directors. ‘They need to be advised, they need to have structure around their oversight, and we provide that,’ McGinness says.

To handle all of these duties, McGinness coordinates a team of highly skilled professionals who are responsive, resourceful and versatile. However, she also partners with different departments in the firm to enlist their support in handling the team’s multiple responsibilities, both in the US and globally. This ability to get other departments to cooperate is central to McGinness’ success in the job – it extends her reach and influence from the US to the other corporate offices in Lisbon, Paris, London and Belgium, increasing her team’s efficiency and ensuring a level of consistency that has made the board more confident in her advice and counsel. In fact, her ability to get the company’s international offices to collaborate has become particularly crucial as NYSE Euronext continues to expand into new markets, products and services.

Special skills

It almost seems fitting that McGinness would play a role in creating the largest stock exchange in the world. As fate would have it, she was appointed outside counsel to the NYSE as a first-year associate at Milbank Tweed Hadley & McCloy in 1997, her first job out of Boston University School of Law.

McGinness did listed work for the exchange for years before joining the NYSE in 2006. Soon after, she gained invaluable experience handling the complex regulatory aspects of international mergers when she handled the NYSE’s acquisition of Euronext in 2007. ‘I was the primary counsel on the regulatory aspects of the merger, so I did almost all the interaction with the SEC staff on getting that transaction approved,’ she recalls.

Successfully completing the NYSE Euronext merger no doubt prepared McGinness for greater things, but it also enabled her to develop a number of skills that are fundamental to handling the corporate secretary role. When dealing with regulators, for example, it’s especially important to be flexible if you want to be successful. ‘You have to be mindful of the fact that there are going to be things that you’ve never had to consider before, such as Dodd-Frank and new technology,’ McGinness explains.

She notes that NYSE Euronext faces some unusual challenges as both an issuer and an exchange operator. The company often has to strike a balancing act because decisions it makes as an issuer may be viewed as recommendations that all listed companies should follow.

For example, when it came to say on pay this year, McGinness says the exchange made no recommendation about how listed companies should handle their vote – annually, biannually or triannually. ‘That allowed us to say to our listed company population that we understand that the discussion with your shareholders about what say on pay should be is really unique to every company,’ she states.

She also points out that when she joined the NYSE it really only traded equities, but it has added so many technological advances in trading that ‘now we think we are on the cusp of becoming a technology company. A lot of companies are finding that there is a real blur between what they used to be and the emergence of technology as an important component of their business model.’

Following through

Being able to project the financial implications of changes in business models or the political and regulatory ramifications of business decisions is another key element of the corporate secretary’s job. ‘When we were going through the merger and the head of the World Bank had to resign, we actually took time to think about what implications there would be if [IMF managing director] Christine Lagarde were appointed and what that would do to the regulatory initiatives that we had pending in front of the European regulatory agencies,’ McGinness says.

One of the greatest values provided by McGinness and her team is the ability to maintain continuity. ‘One of the really important functions the corporate secretary’s office brings to the board is a sense of stability and institutional knowledge,’ says McGinness. ‘Even through management changes, there should be some function that the board can look to and say, This is something that we can rely on.’

Institutionalizing reliability isn’t the easiest thing to do, but McGinness has proven equal to the task. She knows that the board, the executive committee and many departments at the company rely on the corporate secretary’s office for critical information, advice and counsel. Ensuring that information is easily accessible and board members are responded to in the proper manner allows the board, the executive committee and other departments that rely on the corporate secretary’s office to execute their jobs more efficiently.

McGinness’ team’s detailed approach and her experience in dealing with regulators in the US and abroad have already paid major dividends in smoothing the way for the Deutsche Börse merger. ‘When we were sued by shareholders, our lawyers told us we had one of the best minutes they had ever seen – that you could not have made up the minutes that we drafted to be any better than they were,’ she says. ‘We were airtight on so many different points.’

So as the EC continues its probe of the merger, it’s probably not a stretch to imagine that all of the regulatory matters relating to the deal will be found to be similarly in order. ‘I think we’ve done a tremendous amount of legwork,’ says McGinness, ‘but there’s still a lot to be done.’