By Kerry Cappell
As rejections go, this one couldn't have been more blunt. Slamming Australian investment bank Macquarie's $2.7 billion takeover bid on Dec. 9 as "derisory" and lacking "any strategic or commercial credibility," the board of the London Stock Exchange made its disgust clear. But that isn't likely to deter the fast-growing Sydney-based bank.
Macquarie, which is aggressively building up a portfolio including toll roads and infrastructure projects, as well as wind farms and shopping malls across the globe, is determined to snare Europe's largest equity trading market -- companies listed on the LSE have a combined value of $2.9 trillion.
Macquarie is considering the possibility of raising its bid or waging a hostile battle in advance of the Dec. 15 deadline given by Britain's Takeover Panel to present a formal bid.
With three days to go before the deadline expires, Macquarie is canvassing the LSE's biggest shareholders and customers. It's meeting with the Association of Private Client Investment Managers & Stockbrokers (APCIMS) and the London Investment Banking Assn., which represent some of the LSE's biggest users.
Although Macquarie isn't commenting, sources familiar with the situation say the Australian bank is considering raising its offer, from $10.27 a share to $12.38 a share, which would value the LSE at just over $3 billion.
The battle to win control of the LSE is about much more than money, though. Opponents of a takeover see the LSE as vital to ensuring London maintains its lead as Europe's financial center. The LSE's shareholders are for the most part its users. The danger, some analysts say, is that Macquarie, which has never owned an exchange, might prove inept at managing the LSE, eventually eroding London's reputation and reducing all the money and jobs that brings. These shareholders are determined to keep the LSE independent or hold out for a much better offer.
Will Macquarie win over enough shareholders? With LSE shares up slightly since Dec. 9, the market is betting that Macquarie will have to raise its bid to above $3 billion in order to prevail.It would finance the deal with a combination of equity and debt. The bank recently lined up a $1.8 billion debt package arranged by German investment bank Dresdner Kleinwort Wasserstein. Macquarie is also keen to keep the LSE's present management, led by CEO Clara Furse, although Furse isn't expected to be offered any equity should the deal go through.
Than again, if Macquarie's bid falls short, there's no shortage of other suitors waiting in the wings. In December, a previous $2.5 billion offer from Germany's Deutsche Boerse was rebuffed by the LSE's board as too low. The bid also faced opposition from Deutsche Boerse's own shareholders, eventually leading to the May ouster of CEO Werner Seifert.
Rival exchange operator Euronext -- which combines the Paris, Brussels, Amsterdam, and Lisbon stock exchanges, as well as the London-based international derivatives market -- has also made its interest clear in the past. Another possible contender: Swedish exchange OMX, which five years ago tried unsuccessfully to woo LSE shareholders. But now, sources close to the situation believe that should Euronext or OMX express a renewed interest, the LSE board may be more amenable, rather than fall prey to a hostile bid from Macquarie.
The approach from the Australians is just the latest sign of continued consolidation among the world's bourses. Exchanges today are driven by a need to create bigger markets in order to reduce costs, boost profits, and lower fees for users. In the last year, the New York Stock Exchange and Nasdaq have joined forces with electronic trading outfits Archipelago and Instinet, respectively, in a bid to improve global competitiveness. But the 300-year-old LSE so far has sat on the sidelines, determined to maintain its independence.
Now, that could finally change. Macquarie has a reputation for driving a tough bargain. The bank, which was spun out of British merchant bank Hill Samuel & Co. 20 years ago, has expanded by investing in real estate investment trusts and infrastructure projects, attracted by the steady income stream offered by airports, bridges, toll roads, and ferries. The bank typically puts similar assets together into funds that it eventually spins offs into separately listed entities. Its approach is to improve operations, squeeze out more profits, and hold the assets.
RAISING THE ANTE.
"That's a far more certain source of return than buying cheap, making quick changes, and flipping it," says Macquarie's CEO Allan Moss. As a result, he says, Macquarie can win deals by convincing the sellers that it can be trusted to take care of the asset. "Often the sale is not based purely on price [but on Macquarie being a] superior custodian of the asset."
No doubt that's the argument Moss plans to make to the LSE's board. But if the Australian bank is serious about succeeding, it will need to up its price and convince shareholders it's in it for the long haul.
By Kerry Cappell