The LSE's $492 Million Incentive


The London bourse is offering shareholders a large pot of cash to help make the Nasdaq go away. Will it work?

Fighting what appears more and more to be a rearguard action, the managers of the London Stock Exchange are hoping to placate shareholders with stock buybacks to fend off pressure for a sale to the Nasdaq Stock Market (NDAQ). But the plan, announced Jan. 18, to pay up to $492 million to investors while again calling the U.S. exchange's offer "wholly inadequate," will likely do little to keep Nasdaq at bay, U.S. analysts say.

Nasdaq "will continue to work toward putting a deal together that makes sense," says Joshua Elving, a senior analyst at Piper Jaffray (PJC). "Nasdaq, along with some of the large LSE shareholders, at some point will get the London Stock Exchange to the table," he adds (see BusinessWeek.com, 3/14/06, "The LSE: Fated to Be Mated?").

Certainly, Nasdaq isn't throwing in the towel over the buyback plan. In rhetoric that's growing far more shrill as the battle wears on, the New York-based exchange attacked the LSE managers, saying their announcement "fails to provide a long-term strategic vision," offers only a "marginal return of capital," and "shows renewed complacency" about a plan by big investment banks to set up an alternative electronic market.

Battle in the Balance

Indeed, Nasdaq Chief Executive Robert Greifeld predicted that the LSE's profitability is likely to shrink because of an effort the British exchange is making to cut prices in what he called a "belated nod at its customers." The share values of the LSE are likely to be diminished, he suggested.

The LSE's share price essentially stayed put on news of the announcement. It rose by about one third of a percentage point, to 1,316 pence, or about $26 a share. Nasdaq has offered 1,243 pence a share, valuing the London bourse at $5.3 billion. The U.S. exchange already owns nearly 30% of the London bourse (see BusinessWeek.com, 4/11/06, "Nasdaq Takes a Slice of the LSE").

The battle could easily tilt against the London market's managers. U.S. investor Samuel Heyman has amassed a stake of more than 10%, hiking it slightly—from 10.12% to 10.3%—just before the LSE disclosed its buyback plan. While he hasn't sided with Nasdaq, pressure from him, hedge funds that hold LSE shares, and just a few other shareholders could force the LSE board to talk with Greifeld or face a shareholder rebellion. "It's in the interest of the hedge funds to at least push London's management to talk," says Elving.

Nasdaq Talks Tough

Still, the fact that the shares are up nearly 6% over the Nasdaq offer price suggests investors believe there's room for the U.S. exchange to sweeten its offer. Much of the investment interest that has flooded into LSE stock is believed to be "fast money," especially from hedge funds that want only to see a quick gain.

Certainly, the LSE managers believe their exchange is worth more. "Nasdaq's wholly inadequate offer persists in undervaluing the world's capital market," LSE Chairman Chris Gibson-Smith said in a statement. "Shareholders should not be persuaded to sell their shares below their true value."

For their part, Nasdaq managers struck some of their most strident notes yet. In its statement, the New York bourse's board said the buyback plan "proves that LSE would rather weaken its strategic position through reactive tactics than set out a clear vision for the business." The Nasdaq offer is "full and fair," the board said.

Alternative Systems Loom

If Nasdaq backs off, many analysts believe the LSE's share price could easily plunge. The British exchange is facing formidable competitive threats, including a New York Stock Exchange (NYX) that will be expanding its presence in Europe through the purchase of Euronext.

And if seven big investment banks, including Goldman Sachs Group (GS), form their planned alternative equities trading system—nicknamed "Project Turquoise"—volumes could easily slip away from the LSE, whether it's independent or not.

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.

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