When U.S. stock exchanges look longingly at the London Stock Exchange, they see a lot more than just another thriving offshore market. They see a rival that's snaring new business they can't touch: stocks in foreign companies that steer clear of NASDAQ and the New York Stock Exchange (NYX) because of cumbersome U.S. regulations. "The LSE has become the dominant marketplace for foreign listings," says market watcher Benn Steil, director of international economics at the Council on Foreign Relations.
That's why U.S. exchange executives may be about to engage in a bidding war for the 205-year-old British market. The LSE "is a unique property," says Douglas Atkin, chief executive of New York-based Majestic Research Corp., which tracks exchanges. "Once it's gone, it's gone." On Mar. 10, NASDAQ Stock Market Inc. made the opening bid, for $4.2 billion. The LSE declined, and investors quickly bid up its shares, expecting a bigger offer. Its market value now sits at around $5.3 billion, and NASDAQ officials plan to talk with some of the exchange's big shareholders.
Analysts expect the NYSE to join the fray any time now. NYSE chief John A. Thain, eager to play in global exchange consolidation, has said he would like to link with one of three major foreign exchanges -- London, Paris-based Euronext, or Frankfurt's Deutsche Börse. Thain would have to push to win over Paris or Frankfurt, however, because the two European exchanges are now talking with one another. The NYSE declined comment.
The overseas exchanges, especially the LSE, have been winning listings from companies from Asia and Russia. The NYSE was stung a few years ago when big-name Russian giant Lukoil (LUKOY) chose to list on the LSE instead of New York. And just last year, Russian telecommunications powerhouse Sistema opted for London, where it raised $1.56 billion, even though a subsidiary, Mobile TeleSystems, trades in New York. "The key success story is Russia," says LSE Senior Manager Jon Edwards. The market has been hot for newcomers. Through the end of February, 2006, a dozen outfits raised $4.6 billion on the LSE's main market, where larger companies trade. An additional 59 collected $304 million by debuting on an in-house alternative market for smaller companies. Between both markets, the LSE last year attracted 624 companies that raised $30.3 billion.
NEW YORK TURNOFFS
The NYSE and NASDAQ, meanwhile, have lost some foreign listings lately -- with 30 quitting the two since the end of 2004. Last year alone, the LSE attracted a record 129 companies from 29 countries, an 82% hike. Why swinging London? Some 90% of the outfits that looked at a U.S. listing blamed the stiff requirements under the Sarbanes-Oxley Act, say LSE officials. In Britain, executives who inadvertently break the rules might lose their jobs. But "if you break the rules in America, you go to jail," says Clement H. Chambers, CEO of ADVFN, a British Web site that tracks the markets.
London also would offer a buyer the largest, most liquid market outside of the U.S. The LSE boasts 3,100 listed companies worth $7.5 trillion, and the British capital is a financial center rivaled only by New York. Whoever owns the LSE can count on huge volumes from banks, hedge funds, and other big-time traders. In the U.S., by contrast, liquidity is split among NASDAQ, the NYSE, and several electronic upstarts, offering investors lots of choices.
Just what is the LSE worth? Analyst Michael Long of Keefe, Bruyette & Woods Inc. figures NASDAQ could still make money on the LSE from the start even if the price climbed above $7 billion. With the value now more than $5 billion -- higher than NASDAQ's own market worth -- such a price might not be out of line.
Still, the bidding comes at a bad time for the U.S. exchanges. While NASDAQ is keen to beat out any other rival, it is busy integrating other acquisitions. And the NYSE is modernizing technology and adjusting to life as a publicly traded entity.
The battle for London is on, though. And the winner will walk away with a big global prize.
By Joseph Weber, with Kerry Capell in London