Business Analysis: LSE set for cash sweetener to fend off Nasdaq

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The Independent Online

The London Stock Exchange is expected to offer shareholders a further cash incentive as the final card in its attempt to fend off the hostile takeover bid by America's Nasdaq. The pledge is thought likely to be made in the exchange's second defence document towards the end of the week.

Analysts are speculating that the exchange has room to give back another £100m - probably in the form of a share buyback - in addition to the £706m returned since August 2004. But this will serve as little more than a sweetener to the main planks of its defence - the recent sparkling figures and the argument that the Nasdaq's £12.43 a share hostile offer badly undervalues its business.

If the betting is to believed, chief executive Clara Furse has pulled off the exchange's third defence against a hostile bid - and by far its greatest escape.

City bookie Cantor Index rates the LSE as long odds-on favourite to retain its independence, and yesterday WestLB cut its price target on the shares to £12.43.

Its reason? "The US exchange was not able to convince us as to how it will win the necessary support of 20.65 per cent of shareholders to get the majority it needs," the broker said keeping its "hold" advice on the shares. Perhaps this is why the Nasdaq's share price has recovered.

Unfortunately for the LSE, it will not be the analysts or the bookies who decide its fate. That will be down to a group of shadowy hedge funds and the US corporate raider Samuel Heyman - whose motives remain opaque. When the Nasdaq launched its second assault in November its chief executive Bob Greifeld insisted that his bid should not be seen as "hostile" amd held out the prospect of jobs for the LSE's executives and some non-executive directors - notably chairman Chris Gibson-Smith - in the newly-merged business.

Nasdaq sources say it has tried to be friendly from the start - but has been met by intransigence at every turn.

The LSE sees it rather differently. It is understood that the Nasdaq was told when it attempted to open talks that the LSE was committed to a substantial return of cash to shareholders and was not going to entertain deals until that was complete. The exchange felt it had no choice to inform the market of the Nasdaq's approach. One source said: "Then they went into the market and bought a huge stake. How is that supposed to be seen as friendly?"

It was no surprise that the Nasdaq came back six months after its first proposal was withdrawn, but £12.43 was anything but a knockout blow. The exchange was trading above £13 and only dipped on the announcement of competition from a group of investment banks who have pledged to set up their own pan-European exchange.

The Nasdaq's hope was that in taking the bid direct to shareholders, and using the investment banks' Project Turquoise as leverage, the LSE's directors would roll over and open talks after a couple of conversations with their shareholders.

The offer document filed on 11 December continued with the conciliatory tone, and must have felt like being hit by a slice of wet lettuce.

However, by 8 January the lettuce was replaced by a pitchfork as the Nasdaq accused the LSE's board of "milking" customers and showing "complacency" in the face of competitive threats. The US company also claimed the LSE's share price would plunge if the offer were allowed to lapse.

The mood had changed. Far from offering talks, the LSE had attacked the Nasdaq. If there had been pressure from shareholders to come to the table, it did not appear to have been strong enough to force the LSE to change tack.

And as a result, the easy confidence that the Nasdaq had been showing was gone. LSE insiders said the Nasdaq was rattled and they may well be right. Matters were not helped by the fact that the US exchange had been forced to "clarify" its position by the Takeover Panel after reports emerged that shareholders had been told the £12.43 a share offer could be raised by "a few pence". No, said the Nasdaq, £12.43 is our final offer unless there is a counter bidder (unlikely) or a board recommendation (probably only in Mr Greifeld's dreams). The Takeover Panel acted in response to an LSE complaint.

With the battle entering its final phase the LSE's share price remains stubbornly higher than the Nasdaq's offer, closing yesterday at £13.22, up 10p. Part of the reason is that many of the hedge funds bought at prices much higher than £12.43. So did Mr Heyman, who has been adding to his stake in recent days.

If he accepts, and the other hedge funds who bought above that price accept £12.43, they will look rather silly, even though their losses will be mitigated by the use of derivatives.

But the Nasdaq can not raise its offer unless they force the LSE to open talks with the US exchange, which has argued that the massive pile of debt it is using to fund the offer gives it little room to manoeuvre.

A spokesman for the Nasdaq said: "We think £12.43 represents full, fair and final value and we think that shareholders will consider our document and wait to see what London has to say in their next document. We are offering £12.43 as a certainty in cash against an uncertain set of options on their side of the debate."

By making its offer final - a tactic which has met with little success in the past - it has tied its hands with a reef knot. A central plank of the Nasdaq's strategy was that the funds and Heyman would insist on the LSE bowing to the Nasdaq's demand for talks, but so far it has not happened.

The LSE feels it has put a good case forward for retaining its independence. The shares may fall if the offer fails, but this has happened before and they have always bounced back. Mrs Furse and her colleagues must now hope that the hedge funds accept this. There does not appear to be another bidder waiting in the wings, at least in the short term.

The arguments about whether the offer is good for London (most people think it is not) or whether the exchange, and especially the junior Aim market, would prosper under the Nasdaq control (open for debate) have become mere background noise.

They have become irrelevant to the future of the LSE and, apart from legislation to ensure that the exchange has to be regulated by the Financial Services Authority, the Government has washed its hands of the matter.

Ultimately, amid all the sound and fury of the hostile bid, the fate of a key part of London's financial infrastructure that is also at the centre of the country's financial infrastructure has come down to this. Will Mr Heyman and the hedge funds blink?

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