Majestic Research

The Wall Street Journal

Nasdaq Lifts Its LSE Stake to 24%: Move Solidifies Position In Race to Buy Exchange, Raises Pressure on NYSE

By Aaron Lucchetti and Alistair Macdonald
Published: May 11, 2006

The Nasdaq Stock Market bought an additional 5% of London Stock Exchange PLC shares for $321 million, raising its stake in Europe’s largest stock market to 24%.

The latest purchase solidifies Nasdaq’s position as the front-runner in the race to buy the LSE, whose share price has climbed in recent years on the back of other takeover approaches. About a month ago, Nasdaq bought about 15% of the LSE, then bought an additional 4% stake in the company earlier this month.

Meanwhile, Nasdaq disclosed that AXA Group’s AXA Financial Inc. and its Alliance Capital unit had built a 10.6% stake in Nasdaq itself, mostly on behalf of Alliance investment clients. Alliance runs mutual funds and private accounts.

Nasdaq’s purchase of LSE shares put its larger U.S. rival, New York Stock Exchange operator NYSE Group Inc., on the defensive. NYSE Group has held preliminary talks with the LSE and European stock-and-derivatives exchange operator Euronext NV in recent weeks, according to people familiar with the matter, but the Big Board operator has yet to make its intentions known.

The NYSE still could bid for the LSE, but doing so now would be more costly and difficult since Nasdaq can vote nearly one-quarter of the total LSE shares outstanding against any potential NYSE offer.

“This certainly makes it more and more difficult” for NYSE to purchase LSE, says Doug Atkin, head of Majestic Research and former executive at Instinet Group Inc., which sold its trading business to Nasdaq last year. “My belief continues to be that they will make a move, but if they’re going to, they need to soon.”

Any buyer of the London exchange will acquire a vibrant business that is attracting new listings from around the world. Some international companies, for example, have preferred to list on the LSE rather than face what they see as overly burdensome U.S. regulations.

But any U.S. exchange looking for fast growth in derivatives would be better served by looking at Euronext, which operates five European exchanges including a large derivatives market, or German exchange operator Deutsche Börse AG.

Earlier this week, NYSE CEO John Thain told a group of Reuters journalists that he didn’t view a 25% stake as a “blocking stake” in a foreign exchange. Some analysts speculated that if he isn’t readying his own bid for the LSE, Mr. Thain may be trying to drive up the exchange’s share price and thus raise Nasdaq’s acquisition cost. An NYSE spokesman declined to comment.

Nasdaq has paid an average price of just less than £12 ($22.38) a share for its total LSE stake, or about $1.3 billion for 61 million shares. About 2.5 million shares of the 13.8 million shares purchased yesterday came from Scottish Widows Investment Partnership, once one of LSE’s biggest shareholders. Scottish Widows retains about 3% of the LSE. Nasdaq bought other shares from clients of UBS AG, according to a person familiar with the matter.

By raising its stake higher than 20%, Nasdaq can include some of the LSE’s results in its financial statements.

The race to buy up exchange stakes illustrates the exploding growth of financial markets. Even as stock markets in much of the world underwhelm, the volume of global trading has soared, driven in part by computerized trading.

Yet even as the business of being a publicly traded exchange is increasingly good, not all exchange shareholders are convinced they are sharing equitably in that success. Large NYSE Group shareholder Tom Caldwell has written the Big Board and fellow shareholders to complain about the company’s recent “secondary” stock offer. Mr. Caldwell wants more board representation and easier selling provisions, or “lock ups” for investors like himself, who got their stock as part of the NYSE’s conversion to a public company. He accused the NYSE of setting too low a price on the shares sold during the secondary offering. An NYSE spokesman said Mr. Caldwell’s letter was forwarded to the company’s board, but declined to comment further.