What's Next, Mr. Greifeld?

NASDAQ is humming. His contract was just extended. But Wall Street wants more

Robert Greifeld has a perception problem. Two years ago, the hard-charging chief executive of NASDAQ Stock Market Inc. (NDAQ ) won over Wall Street with aggressive moves to steal market share and cut costs. By comparison, his rival, John A. Thain, was struggling to convince investors that the New York Stock Exchange (NYX ) wasn't stodgy and old-fashioned.

Now the roles have reversed. Thain's $14 billion merger with the Paris-based exchange Euronext has transformed the Big Board into a transatlantic behemoth. But in the wake of Greifeld's failed $5.3 billion hostile bid for the London Stock Exchange PLC, which hit the skids on Feb. 10, there's a lot of uncertainty over NASDAQ's future. There's no starker contrast than the stock prices; over the past year, NASDAQ's shares dropped more than 16%, to around 33, compared with a nearly 21% jump for NYSE Euronext. "People have been wondering: What is the next strategic move?" says Morgan Stanley (MS ) analyst Camron H. Ghaffari.

While NASDAQ is making its numbers, and earnings continue to chug along, investors' main complaints seem to be that Greifeld doesn't have a clear vision for the future and that his public moves seem all over the map. The 49-year-old from Queens, N.Y., who worked his way through business school selling computers to Wall Street firms, earned his reputation as a dealmaker. But his serial acquisitions—Instinet's inet unit, Brut ECN, and Shareholder.com, as well as the assault on the London bourse—have left NASDAQ with $1.1 billion in junk-rated debt. The 30% equity stake in the LSE that NASDAQ amassed has become a deadweight; LSE shares are stubbornly trading around the same price as when the deal died. Meanwhile, Greifeld is fighting to maintain trading volume and vie for listings with the reenergized NYSE and new, fast-growing electronic markets like BATS Trading and Direct Edge. But the biggest question: how to diversify beyond U.S. equities?

A merger with the LSE would have solved a lot of Greifeld's problems. But while the low-key Thain used diplomacy and finesse to win over Europeans in his deal, Greifeld went after the LSE like an old-style corporate raider, relying on increasingly strident letters to shareholders after a charm offensive got nowhere. LSE Chief Executive Clara Furse responded by calling Greifeld's brash bid "wholly inadequate." "Most investors still believe in Greifeld," says a hedge fund investor with a stake in NASDAQ. "But he has to get something done this year, or he could be in trouble."

Despite the setback in London, there are plenty of moves Greifeld can make. Already, he has his sights set on the fast-growing options arena, hoping to snag 20% of the market by 2010 or earlier. To do so, he could build his own options trading platform based on the state-of-the-art technology he got in the Instinet deal two years ago. But he might look outside as well. There's speculation he'll snap up the 217-year-old Philadelphia Stock Exchange, which has a 13.4% share in options. But some investors hope Greifeld will go for a flashier if costlier target, such as one with the cutting-edge International Securities Exchange, which opened in 2000 and now controls some 29% of the options market. "ISE has better technology and market share," says financial-services consultant Larry Tabb.


Greifeld could head overseas. There are rumors he's interested in buying the tech-savvy Stockholm-based OMX exchange. Going after Europe's fifth-largest exchange would cost upward of $3 billion. A marriage with the European Goliath, Deutsche Bourse, could also work, though the better-heeled Germans would more likely be the buyers. Some even hold out hope that London's icy resistance to a deal will thaw as rising competition abroad makes it difficult to go it alone.

But so far, Greifeld is mum on specifics, underscoring his chief problem with investors. In a recent conversation with BusinessWeek, he was coy about possible deals, although he was clear NASDAQ needs to play the acquisition game. To that end, Greifeld is keeping some $513 million in cash on hand, and maintaining hefty borrowing capacity, "until we see if some discussions we may or may not be involved with come to fruition." Greifeld adds that he's open-minded about the LSE stake but is holding on to it for now. Whatever deal he makes, Greifeld says the businesses will boost earnings quickly and complement NASDAQ's current operations: "[Acquisitions] will be one bowling pin to the left or right of where our current power alley is."

All this fretting over NASDAQ's next move comes while the business is actually doing well. NASDAQ nabbed 42 initial public offerings in the first quarter, among the highest showings since the Internet bubble burst seven years ago. Those IPOs collected $6.3 billion, the lion's share of the $9.5 billion raised on all U.S. exchanges. And even though the NYSE has attracted tonier Chinese listings, NASDAQ is getting a piece of the action. In the first quarter, NASDAQ notched 73 new listings, transfers, and ipos that included 12 offshore listings, such as burgeoning startup Xinhua Finance Media, a Chinese advertising outfit.

Greifeld is also eyeing the $160 billion-plus market for private stock and bond placements. If regulators approve such a play, he says, "NASDAQ will do what NASDAQ does best—bring automation to this OTC marketplace." In all, Greifeld expects NASDAQ's net income to rise 37% to $175 million this year, despite a weak first quarter linked mainly to the high costs of financing the LSE deal. "If you grow your income quarter after quarter over an extended period of time, the stock price will follow," Greifeld argues.

Meanwhile, analysts are increasingly bullish on the stock. On Apr. 23, Joshua R. Carter of Goldman Sachs (GS ) suggested that NASDAQ's prospects were better than the nyse's, because its trading platform is faster and cheaper. "The recent run-up in [New York's] share price despite increased concerns on fundamentals is irrational," he wrote in a note, boosting NASDAQoS stock.

Indeed, dismissing Greifeld for the stock's near-term turbulence might be shortsighted. Just consider the ex-marathoner's history. When he joined as ceo in 2003, the exchange, amid the fallout from the dot-com bubble, was bleeding money and losing market share. To fix the problems, Greifeld, who wrote his business school thesis on NASDAQ, slashed costs, killed off poorly planned overseas expansion, and shelled out billions to buy electronic trading platforms eating into NASDAQ's market. The stock soared from 6 at the start of his tenure to nearly 47 by January, 2006.

Not to mention that Greifeld still has a pretty big fan base among his private equity backers, Silver Lake Partners and Hellman & Friedman, which own about 23% of nasdaq stock. After the LSE deal collapsed, those private equity players—not known for their patience or warmth—issued a statement supporting Greifeld. They're also voting with their checkbooks. Last year, NASDAQ's board, which includes two executives from the private equity outfits, extended Greifeld's contract by three years and upped his salary by 26% to $7.1 million, plus a $13 million options package. Says Glenn H. Hutchins, a NASDAQ director and co-founder of Silver Lake: "Under Bob [Greifeld], NASDAQ is humming like a top." Now, Greifeld just needs to convince other investors.

By Joseph Weber and Matthew Goldstein

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