Expert View: Take your partners for the Stock Exchange waltz

Current moves resemble the birth of the Eurobond market
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The Independent Online

The drama over the London Stock Exchange (LSE) neatly captures some of the different driving forces behind the explosion in mergers and acquisition activity so far this year, as well as raising some important questions over regulation.

The original deal proposed with Deutsche Börse back in 2001 to set up a pan-European exchange was about consolidation. And while it might have suited the employees, it was rightly rejected by the owners and ultimately scuppered by a bid from the Swedish exchange, OM. The LSE then tried to buy the derivatives exchange Liffe in order to expand, but was rejected and lost out to Euronext, which at one point was also a potential bidder for the LSE itself. Another consolidation bid from the Börse was rejected by the Germans' own shareholders. The Australian buyout firm Macquarie made a bid last year recognising the cashflow characteristics of a quasi-monopoly like the LSE in the manner of the private equity bidders. This too was rejected.

The likely Nasdaq bid, however, is more about strategic positioning. Though the cashflow is important and with the drop in brokerage commissions, the volumes on the LSE are at record levels, making them almost a profitable internet stock. As such, the LSE captures all the diverse reasons for an M&A - consolidation, value, growth and strategic positioning.

However, more is at stake than just the ownership of the LSE, for one of the attractions of the market to Nasdaq or any other US exchange is the very reason why the UK may not want a US bidder - regulation.

In the wake of the Enron, Tyco and WorldCom scandals, regulation in the US by the Securities and Exchange Commission (SEC) was tightened considerably, under the auspices of what is known as Sarbanes-Oxley legislation. As is the way of these things - and there is nothing so bad that a politician can't make it worse - the regulation has all but succeeded in killing the role of US exchanges as raisers of new equity capital.

And true to the law of unintended consequences, it has proved a bonanza for accountants and auditors, the very people whom many would blame for much of the scandal in the first place.

This is almost certainly the reason why Nasdaq and the New York Stock Exchange (NYSE) are keen on buying into the LSE: their own regulators have sent them ex-growth.

Those with long memories will recognise the parallels with the birth of the Eurobond markets in the 1960s. Then, well meaning but ultimately ill-considered legislation in the US created an offshore market for US corporations to raise debt in "Eurobonds" and drove what became - and still is - an extremely lucrative part of what we know as the City.

The real risk, however, is that US ownership of the LSE would bring with it the US regulator and all the wonders of Sarbanes-Oxley into the UK capital markets. Indeed, there is talk of a legal opinion obtained by an investment bank closely involved with one of the many takeover attempts that suggests that there is effectively no way that a US deal could avoid SEC regulation and thus no way it could work - short of an explicit guarantee from the SEC.

This is almost certainly behind the comments of the NYSE that it would favour an alliance rather than a takeover. Meanwhile, Clara Furse and the management of the LSE continue their merry tea dance. Maybe it's back to Euronext. After all, in the wake of the American xenophobia over the P&O deal, now that the Dubai authorities have taken a stake in Euronext, the Americans couldn't possibly get involved could they?

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.com

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