NASDAQ: From Predator To Prey?

After its failed LSE bid, those beaten shares may look cheap to investors -- and rivals, too

Ever Since NASDAQ (NDAQ ) made its first aggressive move to buy the London Stock Exchange (NYX ) last spring, investors have punished its stock. Other major markets, including the New York Stock Exchange, are up more than 50% over the past year. But NASDAQ has sunk by 30% from its March high to 32, punctuated by a two-day, 16% plunge after its latest $5.3 billion hostile bid for the London bourse collapsed on Feb. 10. So is the exchange a deal--either for individual investors or rivals?

Despite the LSE drama, NASDAQ turned in a decent year. Net income doubled, to $127.9 million, on the back of strong trading growth and 94 new listings from other exchanges like NYSE defector E*Trade Financial Corp. (ETFC ) It has also been paring the $1.2 billion of debt used to finance its 29% LSE stake and other purchases.

Other deals could be on the horizon. CEO Robert Greifeld, who has bought two trading networks and three other businesses in his four years, has set his sights on options, with NASDAQ's own system set to launch by this fall. He plans to snare 20% of that exploding market by 2009 or 2010. To do so, Greifeld may need to expand his kingdom. Potential candidates: the scrappy International Securities Exchange (ISE ) as well as regional exchanges in Philadelphia and Boston. (KBW )

Admittedly, the tech-heavy exchange faces plenty of minefields. For one, upstarts such as BATS Trading are biting off chunks of NASDAQ's volume by undercutting its prices. NASDAQ's share of trading in its own listed companies has slipped, to below 45% from 46.6% in December. Competition will only heat up with new regulations that force brokers to find the best price without preference for a market and with new entrants into equities such as the Chicago Board Options Exchange. Already, the company has dampened its 2007 outlook.

If NASDAQ can't dress itself up, the predator may be the prey. Its $3.5 billion market value pales beside the Big Board's $14 billion. For a player like Frankfurt's Deutsche Börse, NASDAQ would provide entrée to the U.S. and London. Private equity players may find it appetizing despite regulatory hurdles. Currently, Bay Area firms Silver Lake Partners and Hellman & Friedman own a total 23%. Both reiterated their support for Grei-feld after the LSE deal fell through. Says financial-services consultant Larry Tabb: "Without the debt from the LSE acquisition, it might be an interesting play."

By Joseph Weber and Matthew Goldstein

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