City waits for the knockout Nasdaq bid that would finally seal LSE's fate

Few in the City doubt Greifeld's determination for Nasdaq and the London Stock Exchange to wed
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Seconds are almost out between rounds in the protracted tussle for the London Stock Exchange.

On 3 October, six months will have elapsed since Nasdaq walked away from a failed £4bn offer for the LSE. Takeover Panel rules prohibited the US's second-largest equity trading platform from taking another bite of the cherry during that time.

However, the forced abstinence is unlikely to have diminished the appetite of Bob Greifeld, Nasdaq's chief executive, for London. Since failing to woo the LSE in the spring, Nasdaq has built a 25.1 per cent stake in LSE that in effect delivers Mr Greifeld a veto on any rival bidder and stymies London from any strategic move not to his liking.

The cost of such a major stake itself adds impetus to Nasdaq's longer-term ambitions towards the LSE. Andrew Mitchell, the exchanges analyst at Fox-Pitt Kelton, said: "Nasdaq borrowed heavily to fund its stake in the LSE. Until it assumes full control, the Americans do not have access to London's cash flow which could be used to service the debt."

To buy London outright, Nasdaq is likely to borrow still more. Experts forecast that the high level of debt heaped on the LSE as a result will echo an earlier failed, highly leveraged takeover attempt by Macquarie, the acquisitive Australian investment bank.

It would be unwise to bet on a fresh move by Mr Greifeld, and his advisers at Greenhill, any time soon. Nasdaq may well choose to keep its powder dry until May after which it will no longer be bound to pay a generous minimum of 1,243p per LSE share - the highest price it has paid so far.

In the longer term, few in the City doubt Mr Greifeld's determination for Nasdaq and the LSE, led by its chief executive Clara Furse, to wed.

Such a marriage would reap an estimated £40m of savings on information technology and as much as £15m from cutting overheads, as well as delivering the scale increasingly chased by a consolidating industry.

That drive towards consolidation was kicked off in May 2000 by the IX merger proposal from the LSE and Deutsche Börse. That quickly prompted the Amsterdam, Paris and Brussels exchanges to sign up to a federal alliance. Lisbon was welcomed to Euronext in 2002, the same year it fought off the LSE to snap up London's Liffe derivatives exchange.

What has followed has been less boxing bout, more game of chess. In June, the New York Stock Exchange agreed a $10.2bn (£5.5bn) "merger of equals" with the pan-European exchanges operator Euronext that few would characterise as anything other than a transatlantic takeover.

The Big Board's European foray is seen by many as a dress rehearsal for the justifications, arguments and counter-arguments likely to engulf the LSE before long. Chief among them is a fear among companies listed in London that draconian US Sarbanes-Oxley (SOX) regulation - rushed through in 2002 to protect investors post-Enron - may be imported to London.

SOX has in effect rendered US markets uncompetitive. The US pain has been London's gain, and business over here is booming.

Last month, the LSE revealed 2006 had already become a record year for fundraisings by flotations, surpassing in just seven months the total raised throughout 2005. International listings had played a "significant role" in this success.

In July, the LSE attracted 25 flotations, raising £7.4bn. Of the eight companies to list on the main market, three were international, raising between them the most in a single month since the giddy days of the boom of 2000.

In June, forthright comments from Callum McCarthy, chairman of the Financial Services Authority, did little to ease concerns among London's stockbrokers and listed companies.

While offering reassurances that US ownership of the LSE would be unlikely to usher in stifling SOX rules in the near future, looking further ahead the FSA could envisage companies here falling outside UK regulation. He warned: "We believe that there could be circumstances where a more complex regulatory position may arise. Theoretically, in the longer term, a new entity might seek to achieve further benefits from rationalisation of its regulatory structure. This could at the extreme involve the LSE no longer being subject to UK regulation."

In February last year, Mr McCarthy damaged an approach by Deutsche Börse by giving voice to similar regulatory concerns.

Both acquisitive American exchanges and the US regulator have sought to mollify fears of regulatory creep. Less than a week after Mr McCarthy's comments, the Securities and Exchange Commission promised not to extend its tentacles into Europe in the wake of transatlantic exchange mergers.

A placatory "fact sheet" insisted that any merger between a US and overseas exchange would not automatically lead to the application of SOX across the group.

Many within London remain far from convinced. Angela Knight, chief executive of the private client broker group Apcims, wants copper-bottomed guarantees. She said: "What we look for is not just warm words on day one, or assurances from the SEC. One requires some proper legal guarantee that every company listed on the LSE will remain subject to UK requirements and UK requirement alone, unless it is also registered in the US.

"That requires both legal undertakings and regulatory agreements. It also requires political agreement, as the US is notorious for knee-jerk changes to its requirements, such as SOX."

She added: "The US often does not look beyond its own borders. If there is an impact outside its borders, it doesn't necessarily see that as problematic. And if you are the biggest economy in the world that everyone has to do business with, it breeds a certain way of looking at things and a certain attitude."

NYSE and Euronext are seeking to defuse these concerns by establishing an independent foundation to look after the European assets of the combined group, and bestow upon it powers to reject any US law deemed to be interfering in regulation and governance in Europe.

There are those who are looking to scupper this first transatlantic tie-up on grounds other than regulation. Chris Hohn, the activist investor who runs the London-based hedge fund TCI, which owns about 10 per cent of both Euronext and Deutsche Börse, is pushing hard for an alternative merger of these two.

Last week he accused Euronext's board, led by Jean-François Theodore, of failure in its fiduciary duty to investors by refusing to put a merger proposal from Deutsche Börse before them.

Mr Hohn, who led the shareholder revolt against earlier Deutsche Börse plans to buy the LSE that ultimately cost its chief executive, Werner Seifert, his job, appears to be betting that Franco-German political pressure for a European exchanges solution will outweigh the competition issues that would bring.

His ambitions for Fortress Europe look likely to be frustrated. A marriage of Eurex, Deutsche Börse's derivatives exchange, and Liffe would deliver dominion over more than 90 per cent of the European derivatives market, a hegemony that would surely trigger a lengthy European competition inquiry.

The endgame among global exchanges is yet to be played out. At this moment it is the Americans who appear to be holding the strongest pieces.