Majestic Research

The Wall Street Journal

Nasdaq's LSE Stake Raises Hurdle for Rival Bidders

By Gaston F. Ceron
Published: May 10, 2006

NEW YORK—By lifting his stake in London Stock Exchange PLC (LSE.LN), Nasdaq Stock Market Inc. (NDAQ) chief Robert Greifeld has built a tall hurdle that rival suitors would have to overcome while putting Nasdaq in position to add its share of the LSE’s earnings to its own bottom line.

Through transactions announced Wednesday, Nasdaq raised its LSE stake to 24.1%, buying about 13.8 million shares for 1,248 pence apiece, or about $320.7 million in total. Nasdaq is the top shareholder in the LSE and has now spent more than $1.3 billion building its stake.

The share purchases are the latest sign that the U.S. screen-based market remains determined to win the LSE despite the British bourse’s earlier rejection of a Nasdaq takeover offer. Nasdaq’s lead, while not insurmountable, will make it tougher for other LSE bidders that may surface.

“Anyone’s going to have to come through Nasdaq,” said Jamie Selway, a managing director at White Cap Trading and a former electronic-market executive.

Moreover, by boosting its ownership over 20%, Nasdaq can now include its share of the LSE’s profits in its results, which could add to Nasdaq’s earnings. Nasdaq didn’t say it will start counting its share of the LSE’s profits, but analysts have said it may, and Greifeld made clear the exchange sees special significance in topping the 20% level.

“We are pleased to have increased our strategic stake in LSE through this significant purchase, which takes us through the important threshold of 20%,” Greifeld said Wednesday in a news release. He added that Nasdaq looks forward “to working constructively with LSE as its largest shareholder.” The LSE declined to comment.

Charles Mulford, an accounting professor at Georgia Institute of Technology, said the equity method of accounting regards an investor with ownership above the 20% level as having significant influence over a company, entitling the investor to add its share of the company’s earnings to its results.

“I think they’d be safe in using the equity method,” said Mulford. While the LSE has been aloof to Nasdaq’s advances, “you can’t ignore a 20% owner,” he said.

Richard Repetto, an analyst at Sandler O’Neill & Partners, calculated that a 22.7% stake - the level to which Nasdaq moved with its first LSE stock purchase Wednesday - would add about 20 cents a share to Nasdaq’s 2007 earnings. According to FactSet Research Systems, the average analyst estimate for Nasdaq’s 2007 profits recently stood at $1.57 a share.

(Repetto doesn’t own Nasdaq shares. Sandler O’Neill has investment-banking ties to Nasdaq.)

Nasdaq shares traded recently up 29 cents, or 0.8%, at $38.63.

Despite the size of Nasdaq’s position, the endgame of the LSE chase remains uncertain. The U.K. market’s track record is that of an elusive target, having disappointed earlier would-be buyers such as Australia’s Macquarie Bank Ltd. (MBL.AU). Moreover, Nasdaq’s big U.S. rival, the New York Stock Exchange, has yet to make a move in the race to consolidate the world’s financial exchanges.

John Thain, the chief executive of Big Board parent NYSE Group Inc. (NYX), has said he wants to be a player in the exchange-consolidation process. The NYSE said in recent regulatory filings that it’s in discussions with other markets about possible transactions. Pan-european market Euronext NV (24151.AE), for example, is seen as a possible target for the NYSE. But so far, the action has been led by Nasdaq.

Doug Atkin, chief executive of Majestic Research, an independent research firm in New York, isn’t counting out the NYSE, saying Thain still has a chance to do a deal with the LSE. Nasdaq has made this more difficult, Atkin said, “but not impossible.” Thain, he said, “needs to move quickly."

Big Board spokesman Richard Adamonis declined to comment Wednesday on Nasdaq’s latest moves. But in comments reported by Reuters Tuesday, Thain didn’t appear to regard Nasdaq’s stake - of nearly 19% at that point - to be an insurmountable obstacle. Speaking at a Reuters Exchanges and Trading Summit in New York, Thain said that, generally speaking, a minority stake, “whether it be 18% or 20% or 25%, I don’t think is a blocking position in terms of the ability to do transactions.”

NYSE Group shares recently traded up $1.86, or 2.6%, at $72.11.