Jeremy Warner's Outlook: Livingstone may well be right. Nasdaq's bid for the LSE is unlikely to be good for the City

Corus: how much leverage can it take? Stan Chartered: the merits of continuity
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The Independent Online

The London Stock Exchange was swift to reject Nasdaq's renewed bid yesterday, yet although the £12.43 offered is still too low to succeed, the US-based exchange must now be close to the level which will cause the walls to crumble.

Nasdaq has chosen not to wait until March, when it would have been free to bid at a lower level. The time for offering less may in any case already have gone for good. Instead, it has used the weakness in the share price caused by news that big investment banks are planning to set up an alternative trading platform, to launch an immediate assault.

Yet how much higher can Nasdaq afford to go? Nasdaq is a smaller exchange in terms of market capitalisation, and by bidding all cash, it is being forced to take on a mountain of debt. Even at the price offered yesterday, the debt as a multiple of cashflow will be quite a bit higher than that proposed by Macquarie last year. The LSE's defence against the Macquarie bid was partly based on the notion that it involved dangerously high leverage that would cause investment to be cut and transaction prices to rise.

The LSE may not feel it needs friends like Ken Livingstone, yet in rushing to the LSE's support yesterday, the London mayor raised some key issues of genuine public concern. One is that although the Americans can apparently acquire us, it would be virtually impossible to do it the other way around. Congress would never allow it. The other alludes to the old point that all takeovers are essentially a conspiracy against the public, designed to diminish competition.

Half way through The Independent's interview yesterday with Bob Greifeld, chief executive of Nasdaq, he had to leave the room to take a call from Hank Paulson, the US Treasury Secretary. No prizes for guessing what might have been said. Mr Paulson is on a mission to reverse the tide of corporate and securities regulation which in recent years has all but destroyed the international competitiveness of American capital markets.

Yet it is American markets which are leading in the rush to consolidate, and if they can impose some of their methods on us then that may be an equally effective way of levelling the playing field. Chicago's two rival futures markets are merging, the New York Stock Exchange is taking over Euronext, owner of the Paris bourse, and now Nasdaq is bidding for the London Stock Exchange.

The new law proposed by Ed Balls, minister with responsibility for the City, may not be equal to the task of protecting London's light touch regulation from such concerted assault. We already know that Mr Greifeld's support for AIM, which has been highly effective in attracting listings away from Nasdaq, is less than wholehearted. Nasdaq may very well succeed, but I doubt very much its takeover will be good for London, or securities trading in general.

Corus: how much leverage can it take?

Money has rarely been more inexpensive and plentiful. Never mind the growing levels of personal indebtedness this is giving rise to, it has also encouraged a boom in highly leveraged takeover activity (see above on the scary levels of indebtedness Nasdaq is taking on in bidding for the London Stock Exchange).

The bidding war which has broken out for Corus, the Anglo-Dutch steel maker, is another case in point. I don't doubt the industrial logic of combining with a low-cost producer from the emerging markets, but I do wonder about the safety of the debt being taken on to allow this to happen.

Steel has hitherto always conformed to a highly cyclical pattern with the high profits achieved at the top of the economic cycle invariably turning into crippling losses when demand and prices subsequently collapse. As HSBC has pointed out in a recent circular, with each cycle investors convince themselves that a new era is dawning, only to have their hopes dashed and lose their shirts in the subsequent bust. Despite the now self-sustaining nature of development in the emerging markets of Asia and Latin America, there is no reason to believe this pattern to be permanently broken.

From India to Brazil, China, Vietnam and even Iran, everyone in the developing world seems to be piling on steel capacity like topsy. China is already a steel exporting nation, and with apparently every town of any size eventually scheduled to have its own steel mill, it will eventually be swamping the world with the stuff. The cycle will thus eventually end as it always does - with a glut of capacity and plummeting prices.

What happens to Corus if these conditions combine with a serious credit crunch hardly bares thinking about. In bidding for Corus, both assailants - Tata of India and CSN of Brazil - plan to finance the takeover largely from debt and then secure the loans against Corus's own cashflow.

When Malcolm Glazer did the same thing with Manchester United, fans accused him of buying the company with its own money. In essence, the same thing is happening with Corus. More humiliating still, both bidders are much smaller companies than Corus.

There may be some justice in the developing world turning the tables on the richer West in this way, but the manner in which it is being done does raise questions of importance none the less. It was only four years ago that Corus was itself bidding for CSN in an all-paper merger which valued the Brazilians at just £1.3bn. It was not to be. Corus got cold feet because of worries about the state of the Brazilian economy and what the new socialist government might do to it. Bad call.

Today, both bids for Corus are grounded in the same industrial logic of marrying the fast growing markets and cheap sources of commodity steel of the developing world with the finished, higher value stuff that services the developed West. The merits of each proposal differ only in that Tata offers access to the possibly greater growth potential of Asia, while unlike Tata, CSN can offer Corus immediate access to cheap sources of iron ore and plate steel.

There is, however, one key advantage that Tata has over CSN, which is that the combined might of the entire Tata empire presumably stands behind its takeover of Corus. This may help underpin the company during the next downturn. CSN on the other hand is a standalone company of less secure financial footing.

With more than £12bn of liabilities to look after, this is going to worry both the trustees of the Corus pension funds and their regulators. CSN promises to match Tata pound for pound in extra contributions to the pension funds. Even so, the fact that it less well supported financially than Tata Steel must be a concern. If the regulator demands greater security for the pension funds, CSN's ability to bid higher may be quite limited.

Stan Chartered: the merits of continuity

Some shareholders were less than happy, yet Mervyn Davies' elevation - or should that be demotion? - to the position of non-executive chairman at Standard Chartered seems entirely reasonable to me. Under Higgs, chief executives are not meant to do this, even if there has been quite a tradition of it in banking, to no obviously harmful effect.

Mr Davies has been CEO of Standard for five years and worked for the company for 15. That's quite enough for anyone given that the great bulk of Standard's operations are in far away developing markets. Most of his life must be spent on a plane.

Yet for Standard Chartered to lose a banker of such connections and knowledge of the markets in which he operates for the sake of complying with the letter of the code would be madness. This is an industry where the old-fashioned virtues of continuity and relationship still count. Mr Davies provides these attributes in spades. To have allowed them to go elsewhere would have been close to negligent. By making him chairman, investors ensure that they keep an undoubted asset.

j.warner@independent.co.uk

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