TMX Group Inc. , owner of the Toronto Stock Exchange, explored a deal with U.S. exchange operator Nasdaq OMX last year before turning to a combination with London Stock Exchange Group Plc.
TMX walked away from the discussions because too much control would have passed to Nasdaq, which is much larger than TMX, said a person familiar with the situation.
Given the relative size of the two companies, any combination would have been a clear takeover of TMX by the U.S. exchange. Nasdaq's market capitalization is almost twice what TMX's was before the latter's Feb. 9 announcement of a proposed merger with the London exchange.
The LSE is much closer to TMX in size, making it possible to craft a transaction that could be billed as a merger of equals, with significant concessions to Canada that deal makers hope will help win the political approval required for the transaction to go ahead.
Even so, the LSE deal is running into political heat on many fronts. One concern that some have raised, even in the LSE deal, is that Canada loses too much control.
But Ontario Finance Minister Dwight Duncan, who has emerged as one of the most skeptical voices about the deal, has also raised questions about whether a merger with a U.S partner would be a better outcome for the TMX, given that the United States is Canada's biggest trading partner. He suggested that the TMX should look at joining with the New York Stock Exchange-Deutsche Boerse merger that was unveiled last week, creating the world's largest exchange company.
NYSE has not showed significant interest in TMX because NYSE doesn't have a major strategic focus on resource stocks, which are the heart of the Toronto Stock Exchange, according to a second person familiar with the situation.
Nasdaq, by contrast, has been more keen to make a deal happen. The company has been shut out of the latest round of consolidation, and there are some parallels between Nasdaq's business and the TMX Group's Toronto Stock Exchange and TSX Venture Exchange. Nasdaq is a hub for technology stocks, including many smaller companies. The TSX and TSX Venture attract investors comfortable with the risk of smaller energy and resource stocks.
"You can draw a synergy between technology and emerging or exploration energy and mining," the second person said.
Nasdaq head Robert Greifeld is said to be particularly enamoured with the TSX Venture, which has provided a fertile ground for small companies to raise capital.
TMX Group spokeswoman Carolyn Quick declined to comment on Friday. A spokesman for Nasdaq did not immediately respond to a request for comment.
The sticking point for any TMX deal with U.S. partners would be governance, because the size difference is so great.
The LSE is only slightly bigger than TMX when measured by market capitalization. As a result, under the planned transaction announced last week, TMX would get almost as many board seats as LSE, Toronto would get significant executive positions such as chairman, president and chief financial officer, and TMX shareholders would own about 45 per cent of the combined company.
Even so, Mr. Duncan, who has the power to block the deal, has said that it appears the transaction is really a takeover because he believes that "control will rest with the other side."
However, that would also be true of any deal with Nasdaq or NSYE. Nasdaq's market capitalization is $5.1-billion (U.S.) and NYSE Euronext's is $9.9-billion. TMX's, even after a rise in the stock in the wake of the LSE deal announcement, is $3-billion (Canadian).
Nasdaq appears to have moved on. The New York Times reported Friday that it is considering joining up with the derivatives-focused InterContinental Exchange to try to buy NYSE Euronext, which would break up the NYSE-Deutsche Boerse merger.