Up Against The Wall In The City

Why the London Stock Exchange may not be able to evade NASDAQ

Since its first public listing, in 2001, the London Stock Exchange has been the target of one takeover bid after another. So far, the LSE and its determined boss, Clara Furse, have managed to elude the net. But the $5.1 billion offer from NASDAQ announced on Nov. 20 could spell the end of the fabled exchange's independence.

Why? For starters, CEO Robert Greifeld of NASDAQ has the leverage other bidders have lacked. After just buying up an additional 7 million shares in the LSE, NASDAQ owns almost 29% of the British bourse. And Greifeld is motivated, even though the LSE rejected his latest offer. Snagging the LSE would bolster NASDAQ in its rivalry with the New York Stock Exchange, which would dwarf almost all other exchanges through its planned takeover of Euronext.

The LSE has also done better of late than either NASDAQ or the NYSE (NYX ) at attracting IPOs. So far this year, $19 billion has been raised in IPOs on the LSE, with an additional $5.8 billion raised on its small-company affiliate, the Alternative Investment Market (AIM), Dealogic says.


By comparison, the NYSE's total is $4.7 billion over the same period. For NASDAQ, it's just $2.24 billion. Companies from Russia, China, and elsewhere find London more congenial than the U.S., in part because they encounter less red tape in Britain. So NASDAQ, long the premier venue for IPOs, needs the LSE to hold on to the crown. Greifeld also wants a piece of Europe's securities business, which is growing three times as fast as that of the U.S.

Global consolidation also makes a lot of sense. "If you had a clean sheet of paper and were designing the world's exchange system, you would never do it the way it is now," says Peter Weinberg, a founding partner of the investment banking firm Perella Weinberg Partners and former CEO of Goldman Sachs International. If eventually just a few exchanges were to dominate, NASDAQ/LSE would master the IPO and equities realm, while Paris-based Euronext and the New York Stock Exchange could focus on equities, bonds, futures, and options. The Chicago Mercantile Exchange would try to dominate the futures market.

Both NASDAQ and the LSE need to bulk up to survive this race. Meanwhile, the London exchange faces the possible defection of key customers if it doesn't act to reduce trading costs. "There is mounting evidence that investment banks are going to be putting more [competitive] pressure on the LSE," says Katrina Preston, director of equity research at Bridgewell Group PLC in London.


The big investment banks say they are fed up with the service they get from the Balkanized European exchanges, including the LSE. "We are the biggest clients, yet we just aren't treated well," says one top London investment banker. One of the top complaints: trading costs in Europe that are 80% higher than in the U.S., according to the banks.

In hopes of lowering costs, seven of the biggest banks--Morgan Stanley (MS ), Goldman Sachs (GS ), Citigroup (C ), Credit Suisse (CS ), Merrill Lynch (MER ), UBS (UBS ), and Deutsche Bank (DB ) --are planning to create their own European trading platform. They're encouraged by new European Union regulations designed to promote competition.

Earlier bids to build alternative exchanges in Europe have failed. But the banks figure the world has changed enough for them to try again. The source involved in the European exchange project says the technology of setting up an exchange is now readily available from Sweden's OMX bourse and elsewhere.

If the revolt of the investment banks gathers momentum, the LSE will have to cut costs, a task it can better accomplish with the economics of scale of a larger group. Of course, the British may try to achieve those economies by merging with someone else. But NASDAQ's Greifeld has the motivation, the money, and the leverage to push his bid to the end.

By Stanley Reed, with Kate Norton in London and Joseph Weber in Chicago

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