Nasdaq Takes a Slice of the LSE

In a surprise move, the U.S. exchange has paid $782 million for a 14% interest. One possible motivation: Circumventing Sarbanes-Oxley down the road

Robert Greifeld, a dedicated runner who finished the Philadelphia marathon in just under four hours in 2002, is not easily deterred. The chief of the Nasdaq., who on March 30 withdrew a $4.2 billion offer for the London Stock Exchange after being rebuffed by managers there, stunned market-watchers on Apr. 11 by snapping up 14.99% of the LSE's stock -- the legally permitted maximum -- for $782 million. The deal makes Nasdaq the biggest single shareholder in the London exchange.

"I was certainly surprised," says Benn Steil, director of international economics at the Council on Foreign Relations and a keen observer of consolidation in the world's bourses. "I think what motivated [Greifeld] to take a significant stake now is that it's quite clear that LSE management is looking around for a tie-up it finds more attractive."


  Greifeld, whose offer in March was deemed too low by LSE management, seems to want to make sure he gets the LSE or has a big say in who does. When he withdrew his offer he said he no longer intended to make a bid, though he reserved the right to do so. Now the LSE is rumored to be interested in arranging a deal with Paris-based Euronext, and some observers say Greifeld could even be positioning himself for a three-way deal.

A Euronext-LSE deal would broaden the London market by adding derivatives and futures to the LSE's equity-trading prowess. Euronext has been trying to cut a deal with the LSE since the end of 2004. Nasdaq spokespeople declined comment on the purchase. LSE officials couldn't be reached.

Greifeld may have other motives for pursuing the LSE. The London market has become a magnet for new listings by Russian and Asian companies that shun Nasdaq and the New York Stock Exchange because they view regulations such as Sarbanes-Oxley as too costly and too risky. Executives who violate the rules under such laws can face jail time, while British regulators take a less severe approach. By owning the London exchange, Greifeld could essentially skirt U.S. rules, via a foreign outpost.


  Greifeld, moreover, is keeping an eye on his main rival, New York Stock Exchange chief John A. Thain. Greifeld and Thain have been interested in expanding their markets overseas. Thain has said he expects at least two of the three major markets overseas -- the LSE, Euronext, and Deutsche Boerse -- to join forces, and that he would be interested in allying with the odd one out. So far, the NYSE -- busy with internal reorganization matters -- has stayed out of the global-consolidation fray. An NYSE spokesman declined comment.

Greifeld's purchase of the 38.1 million-share stake in the LSE would complicate any potential offer by the NYSE. The Nasdaq chief bought most of the shares from Threadneedle Asset Management, the LSE's biggest shareholder. He is expected to increase his stake in the weeks ahead, although just how much more he plans to buy is unclear. Unless he wins approval from the LSE, he is precluded by British takeover rules from buying any more than 14.99% in one week and can buy only up to 29.9% of the shares in the next six months.

As the pressures to combine markets grow, and profit margins in many of them shrink amid competition, several bourses have been interested in dealing with one another. Euronext and Deutsche Boerse, for instance, have been talking about an alliance. Greifeld's purchase "just goes to show how serious the major exchanges are about consolidation and staking out their territory," says William F. Cline, managing partner for capital markets at the Accenture consulting firm. "How the chips ultimately fall is very hard for me to ascertain right now."