Majestic Research

Financial Times

Nasdaq Looks at Europe Growth via Sweden

By Norma Cohen in London and Anuj Gangahar in New York
Published: September 14, 2006

Reports of preliminary talks between Stockholm-based OMX and Nasdaq have added a fresh twist to the cocktail of exchange consolidation which threatens to permanently alter European capital markets.

After all, US-based Nasdaq, which has proclaimed its determination to win market share from its larger rival, the New York Stock Exchange, has already bought a 25.1 per cent stake in the London Stock Exchange.  If Nasdaq is interested in expanding in Europe, conventional wisdom had it that it would do so from London.

So far, neither exchange has confirmed the existence of talks, but significantly, neither has denied it either.

The deafening silence has led shareholders and analysts to ponder what benefits, if any, the acquisition of OMX Group would bring to Nasdaq’s party.

One is clearly the impact that news of talks between Nasdaq and OMX would have on the management of the LSE which, despite Nasdaq’s stake, has vowed to remain independent.  “They may be trying to signal to London that they are dating another girl,” said Doug Atkin, head of a research firm that specialises in tracking the exchanges business.

Meanwhile, analysts suggested that given the LSE’s on-off talks about a merger with OMX over the years, it would not be outlandish for Nasdaq to consider buying both.  After all, the LSE is constrained from buying OMX itself given the size of the Nasdaq stake and the number of event-driven shareholders sitting on its register, all of whom are likely to oppose a tie-up.

OMX is the operator of a clutch of stock and derivatives exchanges in the Nordic and Baltic region.  Also, it has a technology business that it bolstered last year through the acquisition of the markets technology business of Computershare.  OMX has said it not only wants to be an exchange owner and operator; it wants to provide technology and support services to other exchanges, clearing houses and banks.

Among those to whom it has provided technology is the International Securities Exchange, the US electronic options exchange, which has grabbed as much as a 40 per cent share.  Although the ISE has significantly modified the OMX product to suit its own needs, the partnership suggests the range of technology it offers.  Last week, Nasdaq announced plans to enter the options trading business itself in 2007.

However, analysts dismissed suggestions that Nasdaq was interested in OMX’s technology.  “The technology is usually considered a poison pill for a takeover,” said one Stockholm-based analyst, noting that margins are far lower on the company’s technology business than on its exchanges.  If Nasdaq wanted to use some of OMX’s products, it could simply buy them outright.

Mr Atkin suggested, rather, that an acquisition of OMX would simply be a quick way of buying a business with no natural competitors.  “The good news and the bad news is that these are natural monopolies,” Mr Atkin said of exchanges. “The only way to expand your volume is to buy one.”

Michael Long, exchanges analyst at Keefe, Bruyette & Woods which tracks OMX, noted that margins on the company’s exchanges platforms can be as low as 30 per cent when volumes are low and 50 per cent during the current peak of demand for trading services.  Combining the London and OMX platforms could drive margins even higher since there is no additional cost when volumes rise, he said.

But Sweden watchers point out there is one more reason why OMX has suddenly come on to the agenda—with the Swedish government still retaining a 6.7 per cent stake in the business, bankers are betting on an opposition victory and a subsequent sell-off of the stake.

Additional reporting by David Ibison in Stockholm