Prudential Downgrade Saps Nasdaq Shares

Analyst Robert C. Rutschow cites the exchange's declining market share and concerns about its LSE acquisition

Shares of Nasdaq Stock Market (NDAQ) retreated Friday, Dec. 1, after the stock was downgraded by Prudential to underweight from overweight.

In late afternoon trading Dec. 1, the shares were down 7.3% to $37.21, erasing a chunk of their recent gains.

In a Dec. 1 note, analyst Robert C. Rutschow said that while the stock has performed well since Sept. 1 (up 41.7%), he would "take something off the table here", noting several concerns. He said the company's migration to a single book order entry system has had a few glitches, and its market share has declined in early November.

Rutschow also expects one-time charges to earnings to "tick up" in the fourth quarter, which may lead Nasdaq to a "significant" miss vs. consensus GAAP earnings per share estimate; his projection is 4 cents below the consensus.

The analyst also feels Nasdaq's deal to acquire the London Stock Exchange (see, 11/20/06, "The LSE May Finally Fall for Nasdaq") is unlikely in the near term, given that it will not provide stock compensation in the deal; the LSE's share price was recently above the bid (1306 pence, vs. Nasdaq's 1243 pence bid); a rejection of the deal by the LSE board; and "static" from London politicians.

Rutschow also expressed doubts about Nasdaq's ability to take market share, especially with new rivals like ECNs entering the fray. He set a $35 target price on the stock.

This is not the first downgrade the company had to deal with this week. On Nov. 28, its long-term counterparty credit rating was cut to BB from BB+ by Standard & Poor's Ratings Services. The rating actions followed Nasdaq's disclosure of the details of its financing to acquire the remaining shares of the LSE at an offer price of

£1,243 per ordinary share.

The new ratings take into account "the potential transformation in Nasdaq's franchise should it successfully acquire the LSE," but S&P said that such positives would be more than offset by Nasdaq's heavy reliance on issuing more debt to complete this transaction.

If Nasdaq succeeds in acquiring the LSE, according to S&P, the combined organization would become a world-class stock market, operating on two continents and having a favorable venue for global corporate listings. But the ratings agency also said the acquisition carries a high degree of integration risk, and the new debt financing places an extremely heavy burden on Nasdaq's balance sheet.

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