Deutsche Boerse agreed to buy NYSE Euronext for $10.2 billion in a politically charged deal that would create the world's largest exchange operator and put it under German control.
The friendly agreement did, however, dodge some tough issues that could yet derail a deal in the months ahead, when regulators take a close look at the transaction.
NYSE Euronext Chief Executive Duncan Niederauer, an American who would head the combined entity, acknowledged a long road to secure the many regulatory approvals but stressed the necessity of banding together to survive and grow in the increasingly global and competitive trading world.
Deutsche Boerse shareholders will control 60 percent of the new company and 10 of 17 board seats. Still there are suspicions in Germany that NYSE management will be in the driver's seat, in addition to concerns in the United States that the New York Stock Exchange will lose influence and independence.
That tension could raise obstacles to regulatory approval of the deal, which values the two-century-old icon of American capitalism at about $39 a share.
This merger -- if approved -- creates a true thousand-pound gorilla, said Herbie Skeet, analyst at exchange consultancy Mondo Visione.
No name has yet been given to the combined group. Niederauer said talks were continuing to find a name that would address political concerns on both sides of the Atlantic, adding at a news conference that it would be an emotional decision for everyone involved.
Reto Francioni, CEO of Deutsche Boerse, will become chairman of the combined companies. He argued at a news conference that the deal, which he said reshapes our entire industry, would strengthen the roles of both New York, as the financial capital of the world, and Frankfurt, as a European financial capital.
U.S. Senator Charles Schumer, who first raised the name issue over the weekend, has been insisting that NYSE should come first in the name of the group, which will have headquarters in both New York and Frankfurt.
Schumer reiterated those concerns after the deal was announced on Tuesday, calling the NYSE a preeminent brand and saying there was no reason for it not to come first.
The merged entity will have more than $20 trillion in annual trading volume, and operations in the United States, Germany, France, Britain, the Netherlands, Portugal and Belgium.
Under the terms of the deal, each NYSE Euronext share will be exchanged for 0.47 share in the new company; Deutsche Boerse shares will be swapped on a one-for-one basis, the companies said in a statement.
The deal values NYSE Euronext at 13 to 14 times its expected 2012 earnings, and could be seen as cheap given the growth prospects of the combined company, analysts said.
A source familiar with the deal said 55 percent of the shareholders in the new company would be from the United States, with 11 percent from Germany, 11 percent from Britain and 23 percent from the rest of the world.
The exchanges face intense competition in their traditional stock-trading business from newer trading venues geared toward today's increasingly dominant high-speed electronic traders.
NYSE -- created in 1792 by brokers and merchants who met under a buttonwood tree in lower Manhattan -- is one of several exchanges that have responded by investing in technology and moving into more profitable derivatives trading.
But the Big Board's once dominant market share in U.S. equities trading has steadily dwindled in recent years, and NYSE Euronext shares are down 61 percent since early 2007.
Together, the companies dominate futures and options on European bonds, shares and rates, with Deutsche Boerse's Eurex unit focused on the long end of the interest rate curve and NYSE Euronext's Liffe unit on the short end -- potentially raising antitrust questions among market regulators.
Niederauer said the deal was no act of desperation, adding that he assumed it will be subject to a U.S. government foreign investment review.
There also remains a chance that some other U.S. exchange could get involved in a counterbid for NYSE. Officials from exchange companies CME Group Inc and NASDAQ OMX Group will meet to discuss strategy to respond to the buyout deal, Fox Business Network reported on Tuesday.
Niederauer said he was aware of the rumor of a possible CME bid for NYSE but had heard nothing official, adding that the Big Board had signed a deal with a partner that it trusts.
Shortly after the 90-minute transatlantic press conference announcing the deal, the Frankfurt-based company reported a 16 percent quarterly profit drop.
NYSE shares closed trading on Tuesday down 3.4 percent at $38.12, while Deutsche Boerse shares finished 2.4 percent lower.
After a several-year hiatus that included the financial crisis and the beginning of a global regulatory revamp, the world's exchange operators are back in the takeover game.
Singapore Exchange bid for Australia's ASX late last year. And last week, London Stock Exchange said it would buy Toronto Stock Exchange operator TMX Group.
Local concerns over the wave of consolidation sweeping the industry surfaced in Asia on Tuesday as Singapore Exchange tweaked its $7.9 billion bid for ASX to allow more Australian directors onto a combined board --- an attempt to win over skeptical Australian politicians.
Nationalism has long been one of the biggest hurdles to exchange mergers. The marketplaces are often symbols of national pride and important to attracting business and capital.
The LSE-TMX deal has already run into foreign ownership concerns in Canada.
Regulators are paying close attention to the deals, and exchange users have expressed fear that the takeovers will limit competition.
Euronext and Deutsche Boerse are still screwing us on fees for clearing, the closing auctions and small and mid-cap trading -- the areas where they still have virtual monopolies, said the head of markets at a large European bank, who declined to be named. A merger is concerning because together they will be more powerful and better placed to protect these monopolies.
Deutsche Bank and JPMorgan Chase & Co advised Deutsche Boerse on the deal; NYSE Euronext's main financial advisers were Perella Weinberg Partners and BNP Paribas.
(Additional reporting by Philipp Halstrick, Ed Taylor, Paritosh Bansal, Adrian Bathgate, Saeed Azhar, Luke Jeffs and Narayanan Somasundaram; Writing by Alexander Smith and Christian Plumb; Editing by Jane Merriman, Chris Wickham, Martin Howell, John Wallace and Steve Orlofsky)