Dubai stuns world with historic deal,” ran the headlines on the morning of September 20 as the news broke of an end to the 40-day takeover battle between Borse Dubai and NASDAQ for Nordic exchange operator OMX, which operates seven stock markets clustered around the Baltic Sea.

What had been a grim fight for control waged from three continents ended in a truce: the   rivals joined hands to launch a global exchange platform unprecedented in history. Many are interested to see if the new platform, which will be implemented early this year, can evolve into a Gulf common market.

The deal reflects the complexity of the competing interests of the principals.It was agreed that Borse Dubai –the holding company of Dubai International Financial Exchange (DIFX) and the Dubai Financial Market (DFM) formed just weeks ago – will acquire OMX shares at 230 Swedish crowns ($34.96) each and then exchange them for a 19.99 percent stake in the NASDAQ group and 11.4 billion crowns ($1.7 billion) in cash. The second part of the deal means that NASDAQ will acquire a stake in DIFX and re-brand it into NASDAQ-DIFX, subject to clearance from the Securities and Exchange Commission (SEC) and the US Treasury. Finally, Dubai will acquire NASDAQ’s 28 percent stake in the London Stock Exchange (LSE) for about 4.4 billion dirhams ($1.2 billion) and a 19.99 percent stake in NASDAQ itself. The Swedish financial market regulator has approved the bid by Borse Dubai to own OMX.

In the background has been what is called the Doha factor. The battle for OMX was accompanied by a battle for the LSE, where Dubai and Doha have been trying to make inroads to further their strategic objectives. On the eve of the three-way agreement between Borse Dubai, NASDAQ and OMX, Doha played the spoiler, buying a 9.98 percent stake in OMX as “supportive holdings in the European exchange infrastructure.” It already held a 20 percent stake in the LSE.

However, Doha came around to accepting an exchange of its stake in OMX for part of the stake held by Borse Dubai in the LSE. Subsequently, Qatar Holding, the investment vehicle and a subsidiary of the Qatar Investment Authority (QIA), withdrew its request for approval of a bid for OMX, opening the door to completion of the $5 billion takeover.

Although Doha upset the apple cart somewhat, and its subsequent turnaround, according to some, represents a defeat, its entry acted as a catalyst toward a resolution. Says one source,“I think Doha’s entry actually helped Dubai’s bid because non-Middle East parties realized that if they don’t seal the deal now, more and more players may try to get in.”

Added another source, “Doha ended up with 20 percent of the LSE and we have to see what they do with it. They could treat it as a long-term investment. Nobody knows what they have in mind, though.” It is a marriage of convenience, he says, adding, “Somewhere down the line all parties realized that they actually wanted different things from the same target, hence the cooperation.”

Systems integration. Majid Shafiq, a director at regional investment bank Rasmala Investments, says the reason OMX was chosen, besides strategic expansion, was because of systems requirements. Most exchanges in the region, including the DFM, use systems owned by OMX.

Far from smooth. A senior Dubaibased journalist, who has witnessed the events unfolding from close quarters, says the ride to the finish was far from smooth: technical and pricing agreement between OMX and NASDAQ had already been reached when Borse Dubai became a bidder. “Interestingly, when [Borse Dubai] entered the arena they did so after making acquisitions

through hedge funds. The positions were taken with options in order to circumvent the takeover law in Sweden. That was because anything above 9.9 percent would have triggered the takeover court and then Borse Dubai would have had to make a full bid,” he says. In other words, instead of buying the shares directly, they contacted hedge funds and owners of significant minority stakes and signed payment options contracts with them. “Such contracts meant that there was a commitment to buy but a reverse contract would be invoked if it was not working out,” he says.

NASDAQ, which was desperate to close the OMX deal as part of its own expansion strategy,  found it could not complete the earlier agreed deal with OMX. “Even if NASDAQ had gone ahead with the deal, they wouldn’t have gained control. The reason was that 29 percent was with them, and the rest were floating stocks by minority shareholders and a few institutional investors,” says the journalist.

“NASDAQ was not sure that the institutional investors would go with them because Borse Dubai had deeper pockets and could have paid a higher price. Borse Dubai was also offering a higher price (230 crowns per share) compared with NASDAQ’s 198-203 crowns,” he  says. Fortunately for Borse Dubai, the market reacted positively to its entry and share prices rose, which was probably another reason NASDAQ had to budge. The choice for NASDAQ was to   either abandon the deal and sell those shares at a discount or get institutional investors which they were not sure of. “Especially the conservatives ones like mutual fund Nordea and the Wallenberg were not forthcoming. So they had to sit across the table and some hedge fund people brokered the deal,” he says.

Other industry insiders say that in the lead-up to the deal, Doha was by no means keen on taking over OMX. “QIA entered to get a bargain out of the whole thing because they just wanted to buy  NASDAQ’s stake in LSE. When Borse Dubai and NASDAQ agreed on the OMX deal, this apparently peeved QIA and they got some 20 percent of LSE from private investors. This move was supported by LSE’s management for some tactical reasons probably to counter Borse Dubai’s plans,” says another source. “The first offer by Borse Dubai for OMX shares was 230  crowns but with QIA buying shares, the price went up to 268 and the deal is finally being brokered at that price. This is the stage where government figures stepped in and restored order,” he says. He says it is possible the QIA will make an outright bid for LSE early this year.

Common market. Those in the financial services industry eagerly awaiting the final outcome say that the deal should be seen as a means to an end and not an end in itself. “The Borse Dubai bid for OMX is different from DP World’s acquisition of P&O because that had a bigger strategic element to it. DP World had tasted success on its home ground and they knew that they are  masters at their business so they can acquire and run successfully. If you have money, you can acquire almost anything but the equally important component is to have the expertise to run it,”  says the director of a leading exchange in the Gulf region. He says that companies in the region should not assume that they will get a listing at NASDAQ just by virtue of the Borse Dubai association. “You have to have a very strong corporate governance track record. The main  reason why NASDAQ wanted to come here was because this is a liquid market. But who gains more than the other is something that only time will tell,” he says. According to him, the crux of  the matter is that NASDAQ wanted OMX by any means and they got it. “It was like someone  buying it and giving it to them like a gift. So looking at it from that perspective

NASDAQ is the only party that gained something out of this. It may turn out to be a long-term success story for Bo r s e Du b a i b u t a s o f n ow we have to wait and watch,” he says. If doubters like him are right, the deal happened because the parties were already neck-deep in it and backing out was not an option anyone could afford.

The deal may or may not have fulfilled strategic objectives of both Dubai and Doha but, once implemented, it is certainly going to be good news for the bourses in the region. Analysts say that if all the leading exchanges link up, a common market will be realized. “It is possible that such a  thing is on the cards and is being kept a secret but it is true that common technology is the surest way forward to a common market. However, since the region is slow in matters of cooperation, it may take some more time,” says one such observer. Per E. Larsson, chief executive of Borse  Dubai, recently said the new partnership “will play a key role in the consolidation of stock   exchanges across the Middle East and Asia and that there will be more niche exchanges and exchange-like mechanisms.” Borse Dubai has also agreed to $5.8 billion of loans with a group of international banks to help pay for the acquisition and the shares of LSE it plans to purchase. Shafiq, of Rasmala, says combining forces would make both the entities stronger because  NASDAQ wants a foothold in the DIFX and taking 20 percent of NASDAQ is a good investment  for Dubai. “Linking of the liquidity pool has largely been accomplished in the Western markets,  certainly for the equity markets. So they have begun to look at the liquidity pools in the emerging markets, that is, bringing developing countries in the global streams of liquidity,” he says. Shafiq says that since a lot of profitable local family owned businesses will be coming to the market they will become regionally competitive enterprises with substantial tranches of international activity.

“To make this quantum leap forward equity needs to play an important part in their capital structure because they cannot bring it by utilizing credit and debt all the time and have to expand their equity base. Once they go through the required equity injections, they become ripe for tapping the public market and doing an IPO. The ultimate expansion of the equity base is to become a very competitive regional player with substantial amount of regional activity

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