Transatlantic suitors seek hi-tech advantage from tie-up with LSE

A takeover is no longer a question of 'if', merely 'how much' and 'who'
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The Independent Online

If the LSE chief executive was rolling up her sleeves for another long-winded defence of Britain's grandest financial institution, she can surely roll them back down.

Bankers who have been earning huge fees for the past six years by stopping the LSE from being bought also seemed to realise the game is almost up.

Judging by City reaction to the 950p-a-share bid from Nasdaq that emerged on Friday night, it is no longer a question of "if", merely "how much" and "who".

The LSE is valued at levels that were improbable a few years ago, when the stock exchange was regarded as an ineptly run bureaucracy with management that seemed hopeless. Under Ms Furse, it is the most sought-after stock market in the world. The shares rocketed more than 30 per cent yesterday to 1,149p, a giddy all-time high.

Clearly, Nasdaq is going to have to offer more money, as well as shares in the combined business, to succeed.

But it seems clear that this bid, or one from the New York Stock Exchange, or maybe even a merger with Euronext, will happen.

The LSE, which has been defiantly saying "no thanks" to takeover offers since at least 2000, began to sound like the National Lottery slogan "maybe, just maybe" yesterday. Privately, City institutions are salivating at the prospect of a bidding war for the LSE that could lift the take-out price into the realms of fantasy (£15 a share? Why not.)

Even normally silent City investors are speaking out. Threadneedle Asset Management, which has nearly 14 per cent of the stock, normally takes "no comment" to a high art. Yesterday it released a statement that reads: "As the LSE's largest shareholder, we have consistently encouraged the board to take a bold and steadfast view of its future and, should independence no longer be tenable, to maximise the value of its franchise. We are now willing to discuss proposals with interested parties."

That is about as close as large investors ever get to saying in public "sell this company now". Scottish Widows said something similar on Friday night.

Ms Furse and her colleagues and advisers were taking soundings from other big investors yesterday and are understood to have heard more of the same. One source close to the LSE said: "People thought our independence would be over 18 months ago. People said it was 'game over'. But certainly price-wise, this is in the right direction. What happens now is out of our hands." The "out of our hands" comment is an acknowledgement that investors want a deal done.

A rival offer from the NYSE is being worked on by bankers at Goldman and Citigroup, it is understood, and cannot be far away. John Thain, the NYSE chief, will be miffed at being trumped by his closest rival and could make a counter bid this week. Nasdaq feels vindicated. Insiders claim the pressure on the LSE to enter at least informal takeover talks is intense.

But what is it about the LSE that rivals find so alluring? Aside from its base at the heart of what is increasingly being seen as the most dynamic financial centre in the world, the LSE's big appeal is its super-fast trading system.

The exchange has three core businesses. It attracts companies that want to float and raise capital by offering them access to the most liquid market in the world. Second, it sells information services, usually through the Reuters or Bloomberg terminals that dominate the City. But it's the Sets trading system that is the real jewel. Nasdaq computers aren't bad, but they don't compare with London's.

The NYSE, incredibly, still relies on open outcry for much of its dealing - men with pencils scurrying across a dusty floor in an atmosphere of chaos.

What both of the US outfits want is speed and reliability. The LSE hasn't had an outage in six years (by comparison, Tokyo seems to have one a week). London also has high levels of spare capacity, despite record levels of trading, and seems able, metaphorically, to open a new motorway lane when traffic surges.

Nasdaq also predicts huge cost savings, to the business and to investors, from a takeover. Some come from merging the back office, but mostly it is to do with trading and the cheaper settlement of share deals.

Exchanges are largely fixed-cost businesses and the more volume they can do, the more profit they take. It would also be easier for companies to raise capital if investors from both sides of the Atlantic had simple access to the same trading exchange.

An initial panic, that a takeover by the Americans would expose London to business-killing US regulations, seems to have been largely calmed. Nasdaq will keep LSE as a separately run outfit with its own board, insisting there is "no chance" the feared Sarbanes-Oxley regime will be imported if a deal is done.

The big banks might be satisfied by this, but smaller stockbrokers are not.

Charlotte Black, the marketing director at Brewin Dolphin, said: "I still have complete doubts about the regulation. I can't see how an American exchange can allow a wholly owned subsidiary to have a competitive advantage. Wouldn't they impose the same levels of regulation in the end?"

For the moment, Nasdaq prefers a friendly deal, but plans are under way for a hostile bid if the LSE isn't prepared to talk.

Ms Furse and her bankers at Merrill Lynch and Lehman Brothers are thought to have quietly asked Nasdaq to wait - at least until summer.

The LSE plans to return £510m in cash to shareholders - a promise made when fending off the recent offer from the Australian investment bank Macquarie - and wants to be left alone to do so. Nasdaq has countered that it has no problem with this return of capital, but doesn't see why it should delay a merger. Ideally, it would like to secure its offer before the NYSE gets involved and the bankers at Goldman start making the usual mischief.

Euronext, the European exchange that gets cross when it is described as "Paris-based" because that makes it sound too French rather than pan-European, reports results today. It isn't expected to give too much guidance on its intentions towards London, but it is interested. Euronext's share price, like that of most stock exchanges, has soared in recent weeks. "Possibilities multiply," one source said.

The LSE, the elderly gentleman of the City, is 205 years old. Nasdaq is 35. The youngster has big ideas, one of which is a seamless market operating from 8am in London to 4pm in New York (9pm London time). It is a dream that looks more likely to happen than ever before.