On December 22 Nasdaq OMX announced it would transfer its 33.3% stake in the budding exchange to Dubai Financial Market, in return for a 1% stake in DFM.

Bernardo Mariano, a partner at the Equity Research Desk, a New York analytics firm, argues that Nasdaq had only ever valued its deal with Borse Dubai, the exchange’s holding company, as a strategic alliance, rather than as a profit-making venture.

“At the time, it was important for Nasdaq,” Mariano said. “The most important factor they got out of the deal was not to get dragged into a price war over OMX with Borse Dubai. Look at what they paid. That was the strategic arrangement for them, so I don’t think they’ll be too worried. They will have agreed to the sale.”

Nasdaq OMX’s new 1% stake in DFM is valued at around $39m and entitles it to keep one seat on Nasdaq Dubai’s board.

Nasdaq Dubai will continue to use Nasdaq’s brand and technology. So far, Nasdaq Dubai’s staff are expected to stay on.

At first sight the deal looked like an abrupt curtailment of Nasdaq OMX’s ambitions in the Middle East, suggesting either that the US-based exchange had suddenly given up on the project, or that interests in Dubai wanted more control.

It will also cost Nasdaq OMX money. Announcing the deal, the exchange said it would take a pre-tax, non-cash impairment charge, expected to be around $81m. Its original investment in February 2008, valued then at $128m, was of $50m in cash and some technology and trademark rights. By the time of the deal, the carrying value of the investment was $120m.

But the context sheds light on the present situation. In May 2007 Nasdaq made an initial bid of $3.7bn for Scandinavia’s OMX Group, a derivatives exchange with sophisticated technology. But four months later, Borse Dubai tried to thwart the move with a rival bid of $4bn.

Instead of a bidding war erupting between the two exchange groups, however, Borse Dubai struck a deal with Nasdaq to take a 20% stake in the US exchange, along with Nasdaq’s 28% holding in the London Stock Exchange.

This allowed Nasdaq to complete its takeover of OMX at the initial $3.7bn price, in spite of a late bid by the Qatar Investment Authority. The deal to form Nasdaq OMX was completed in February 2008.

Another part of the deal with Borse Dubai was that Nasdaq got a one third stake in the Dubai International Financial Exchange – the emirate’s internationally focused stockmarket. This was rebranded as Nasdaq Dubai in November 2008, at the same time as Nasdaq Dubai launched the first equity derivatives market in the United Arab Emirates. 

Pushed or jumped?

Officially, Nasdaq OMX welcomed its partial exit from the investment.

Adena Friedman, its CFO, who is also on the Nasdaq Dubai board, said: “The combination of the two Dubai exchanges has long been seen as a preferred way forward. It will create greater efficiencies from a systems perspective, enabling retail investors to better access Nasdaq Dubai and providing issuers with a choice of commercial and regulatory structures.

“We remain committed to participating in the development of the capital markets in the Gulf Cooperation Council region and we believe that this transaction will enable Dubai to structure the financial markets for future growth.”

Both Nasdaq OMX and Nasdaq Dubai declined to comment about whether the US exchange had been pushed out of Dubai, had wanted to reduce its involvement, or, as Mariano suggested, was indifferent because it had only seen Nasdaq Dubai as a means to getting the OMX stake.

Consolidation drive

Most observers agree that from the point of view of the Dubai and Middle Eastern financial markets, bringing DFM and Nasdaq Dubai together makes sense.

DFM has said it expects the takeover of Nasdaq Dubai to be completed by the middle of February.

“This agreement is the outcome of a year-long review and ultimately aims to enhance efficiency and maximise value for all stakeholders,” said Essa Kazim, executive chairman of the DFM.

“With this transaction, DFM will gain a wider array of product offerings for investors and a clearer path to integrate certain back office and technology functions with Nasdaq Dubai. Unifying the ownership structure of the two exchanges will further strengthen Dubai’s leading role as a centre of capital markets and innovation that places the interest of investors, issuers and brokers first.”

Mariano said Nasdaq’s withdrawal was a watershed for investment in the Gulf by international exchange groups, saying the model had not worked as well as Nasdaq or Borse Dubai expected.

“There’s more in it for the local exchanges than there was for the international groups,” he said. “Essentially, they’re saying: ‘you lend us your name, we’ll use it to attract listings.’

“We’re going to see a lot more consolidation in that region – it makes sense. What is the point of having so many separate exchanges across the Emirates? If you look at the business model of exchanges, they tend towards consolidation and costs savings. This makes even more sense on a local level.”

Mariano reckons the most likely tie-up will be between Abu Dhabi and Dubai.