Majestic Research

Financial Times

Questions Hang Over the NYSE as Nasdaq Guarantees Itself a Seat at the LSE Table

By John Authers
Published: April 12, 2006

Nasdaq’s announcement that it had bought a 14.99 per cent stake in the London Stock Exchange yesterday took traders in London and New York by surprise. But almost immediately, attention turned elsewhere.

Nasdaq’s friendly approach last month, at 950p, failed to force the LSE’s management into talks, and also failed to flush out a response from its great rival, the NYSE Group, which controls the New York Stock Exchange.

Now that Nasdaq has bought the largest stake it could in one day under the London market’s rules, and has done so at the aggressively high price of £11.75, the managements of the NYSE and the LSE may be forced to respond.

“Our view is that it’s a great move for Nasdaq,” said Doug Atkin, head of Majestic Research and a former chief executive of Instinet, which sold its Inet platform to Nasdaq last year.

“They’ve guaranteed themselves a seat at the table and it was unclear whether the LSE was figuring to give them even that. The issue now is what does the NYSE do? And what does the LSE management do?” Joseph Gawronski, chief operating officer of Rosenblatt Securities, agreed: “This is a very bold move and it certainly puts the LSE management and the NYSE management in the hot seat.”

Nasdaq declined to comment beyond the basic information given in its statement to the market. The NYSE also declined to comment.

Analysts suggested it was a necessary move, given the failure of its initial approach, which was rebuffed by LSE management as being too low.

When Nasdaq offered to put its case directly to shareholders, the response was merely to hear demands from Threadneedle - which eventually sold its stake - and from others that the price needed to be higher.

However, Mr Gawronski said Nasdaq’s latest move “makes it very easy for the NYSE to come in as a white knight, if they are willing to pay the price”.

This is thought to be the preferred strategy of John Thain, the NYSE’s chief executive. While he has made no secret of his interest in taking a role in European stock exchange consolidation, his preferred strategy has always been to act as the white knight, coming to the rescue of Clara Furse, LSE chief executive, and the rest of the LSE management.

With no offer on the table, it was difficult for him to proceed. After yesterday’s move by Nasdaq, he may have his opportunity.

The timing, however, makes things difficult for both the LSE and the NYSE. The NYSE is in the middle of technologically complicated roll-out of a new system of “hybrid” trading, which combines its traditional floor trading with an electronic platform.

It is also near to completing the secondary share offering needed to allow its members to convert their holdings into cash, following last month’s demutualisation. Analysts had therefore assumed that Mr Thain would prefer to wait for several more months before making a move.

Meanwhile, the LSE intends to move forward with a plan to return capital to its shareholders. Again, the Nasdaq stake forces its management to take other issues into account.

Valuation will become increasingly contentious. Estimates vary but Wall Street analysts tend to think that a sum close to £12 a share is the maximum that Nasdaq could offer without diluting its earnings. This puts the price paid for Threadneedle’s stake towards the top of its range.

Who will win? The market’s instant reaction was that Nasdaq had tipped the balance in its favour and that it was still possible to do a deal at a price that made financial sense.

Yesterday, at the moment the Nasdaq announcement hit traders’ screens, both Nasdaq and the NYSE’s share prices were down significantly for the day in New York trading. Nasdaq’s shares rebounded, and were trading up 2.6 per cent for the day soon after. NYSE was down 3.8 per cent.