Markets & Finance

The LSE: Fated to Be Mated?


Suitors from places as far-flung as Paris, Germany, and Australia have wooed the London Stock Exchange for much of the last year, only to find the 205-year-old outfit one very coy mistress. But now that the fast-growing LSE has rejected a fresh approach by the Nasdaq Stock Market (NDAQ), and its market value is reaching new heights, the exchange likely could wind up in the arms of one of its erstwhile rivals -- and soon.

The multibillion-dollar questions: Who will the lucky suitor be? And how much will it pay? The LSE "is a unique property, and it knows it has a lot of potential suitors," says Douglas Atkin, chief executive officer of New York-based Majestic Research, an independent firm that closely tracks exchanges. "Once it's gone, it's gone." Indeed, the value of the LSE went up some 30% on Mar. 13 alone. It has risen threefold overall, to about $5 billion, over the past three years.

That's why analysts expect that Nasdaq will soon raise its informal offer of $4.2 billion, which LSE management rejected on Mar. 10. The U.S. exchange is already planning to talk with large shareholders in the LSE to find out exactly what will win them over, a person knowledgeable about the matter told BusinessWeek Online. On Mar. 13, Threadneedle Investments, which holds 13.8% of the LSE's stock, signaled its interest in talking with suitors by saying that the exchange's board should try to "maximize the value of its unique franchise."

EURO-MERGER? But Nasdaq may not be alone in pursuing the outfit. The New York Stock Exchange -- busy with its merger with Chicago-based Archipelago Holdings and conversion into a publicly traded company -- could yet weigh in with an offer, market experts say. NYSE Group (NYX) officials declined comment on the possibility, but CEO John Thain has often said he believes the NYSE will need to ally with an exchange in Europe to stay ahead of global consolidation among exchanges. He has said he expects two of the three big bourses in Europe to join, freeing him to snap up the odd one out.

Market watchers say neither Paris-based Euronext nor Germany's Deutsche Boerse, two previous bidders, will likely join the party for the LSE. Instead, they may be focused on merging themselves. Reto Franconi, the new Deutsche Boerse CEO, has gone on record saying that Frankfurt's natural partner is Euronext. Shareholders in the German marketplace last May forced out the top executive who tried to buy the LSE in a deal he launched in December, 2004, that would have cost $2.3 billion -- a price then seen as too high.

And it isn't clear whether another former suitor, Australia's Macquarie Bank, whose $3.5 billion offer in December was spurned, will be back, either. Deutsche Boerse officials declined comment, and officials with the other outfits couldn't be reached.

SARBANES-OXLEY AVOIDANCE. Just what has got the world's bourses so hot and bothered about London? For one thing, the exchange has been thriving as a natural monopoly for London-based trading in hot British stocks. For the first nine months of the fiscal year that ends this month, earnings for the exchange are up some 43%, while overall revenue is up 16%, LSE officials say.

More important to the U.S. exchanges is that the LSE has become a hotbed for new listings. Indeed, the LSE is especially enticing to companies from outside Britain that might have opted for either the NYSE or Nasdaq if it weren't for cumbersome regulations such as Sarbanes-Oxley. Even some small companies from the U.S. have fled to Britain for listing to avoid the requirements, market observers say.

For either Nasdaq or the NYSE, acquiring the LSE could be a way to snare business now turned off by the U.S. securities markets. Indeed, short of repealing the U.S. legislation that many foreign executives see as terribly invasive and risky, the London bourse represents the last major vehicle for buying back that business. It would offer a way to take back, in effect, listings like Russian telecom powerhouse Sistema, which listed on the LSE last year, raising $1.6 billion, even though a subsidiary trades on the New York exchange. Such stocks are much coveted by the U.S. exchanges.

"It's the U.S. securities market's way to get back business we've lost," says Benn Steil, a market watcher who's director of international economics for the Council on Foreign Relations.

BAD TIMING. Along with new listings, the London market will offer any buyer a chance to garner liquidity that simply couldn't be grabbed otherwise. In a kind of virtuous circle, traders go to the heavily electronic LSE because that's where other traders go. In the U.S., by contrast, liquidity is split among Nasdaq, the NYSE, and several electronic upstarts, offering lots of choices for investors. Since the LSE already is heavily electronic, upstarts -- like Chicago-based Archipelago -- haven't posed a threat to its market as they have to the NYSE and Nasdaq.

But as the price for the LSE rises, it's unclear just how much that monopoly and the lost listings will be worth to a U.S. buyer. The bidding for it amounts to a giant poker game, begun at perhaps the worst time for the U.S. exchanges, observers say.

For Nasdaq, which itself has a market value of just $3.5 billion, swallowing the LSE, with its richer $5 billion value, would mean a huge financial commitment at a time when Nasdaq's busy integrating other operations it has acquired. While the NYSE's market value is higher, at over $12 billion, it also would have to tie up a lot of new capital in doing such a deal -- just when it's trying to modernize its technology and adjust to life as a publicly traded entity.

"GAME OF CHICKEN." For the U.S. markets in particular, offers and counteroffers now could be nerve-wracking. The winner will wind up paying stiffly, even as the loser is sure to claim victory, saying the winner overpaid. What's more, some observers say that expansion into the equities markets is probably not as promising as growth in the derivatives areas, such as futures.

"It's a kind of game of chicken," says Majestic Research's Atkin. At the end of this game, though, one of the world's marketplaces will probably be a lot bigger and a lot more global, thanks to the LSE.


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