Nasdaq merger offer shunned by London

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The London Stock Exchange (LSE) turned its back on a deal with Nasdaq, the giant US market, to merge with the Deutsche Börse, senior City sources have told the Independent on Sunday.

The London Stock Exchange (LSE) turned its back on a deal with Nasdaq, the giant US market, to merge with the Deutsche Börse, senior City sources have told the Independent on Sunday.

The US technology market offered to invest directly in the London market in order to set up a European base. However, these plans were dashed when London decided to merge with Frankfurt to create the iX market.

Nasdaq has now said that it is interested in taking a stake in iX and has publicly given its backing for the merger between the London and Frankfurt markets.

At the same time and privately Nasdaq officials have been telling their counterparts at other exchanges that they would be quite happy if the London and Frankfurt deal fell apart, allowing Nasdaq to deal directly with the LSE.

A senior City source said: "I was quite surprised there was no mention of the Nasdaq talks in the iX merger document [published last week], but then again I suppose there's no obligation to."

The merger of London and Frankfurt has still to be approved by the members of both exchanges. It is still far from certain that the deal will be accepted, despite an offer to help smaller stockbrokers with the costs of changing to the German settlement systems.

Many of the City's smallest stockbrokers are looking forward to a multi-million pound windfall tomorrow when they have their first chance to sell their new shares in the LSE.

At 9.00 on Monday morning, the LSE's stock will commence trading at Cazenove, the venerable City institution, following the exchange's decision to demutualise. Some of its smaller members will find the opportunity to bank an instant few million pounds irresistible.

"We've got 100,000 shares, and on Monday we'll be selling some 99,999 of them", said the head of one such company. "We thought we ought to keep one so we could say we were still members of the exchange. All we really care about is banking our money."

Analysts have forecast that the shares will be worth about £23 each, netting this firm an immediate profit of almost £2.3m. A £23 share price would value the exchange at about £700m.

Cazenove will preside over a complicated "matched bargain" method of trading the new stock. Every day, orders will be placed from 9.00 in the morning, and then at midday will come a half-hour auction to match buyers and sellers.

There have been reports that the larger investment banks will start buying shares if their smaller counterparts decide to sell, although one source suggested this was a story put round by an eager seller to push the price higher. No single institution is allowed to own more than 4.9 per cent of the entire stock.

Critics believe the exchange will be a poor investment because of the fierce competition it is likely to face by upstart exchanges like Jiway and Tradepoint.

"This is an old-economy merger," said one dealer. "The right trade is to sell London Stock Exchange shares and buy Tradepoint. All that can possibly happen to iX is that other exchanges catch up with its technology."

Don Cruickshank, the current chairman of the London Stock Exchange, has embarked on a charm offensive to convince the merger's opponents of its merits. He is expected to meet representatives of most of its members before the deal goes to the vote in September.

Mr Cruickshank's critics among the smaller members will have the opportunity to express their annoyance at the way the exchange has relied on the advice of big investment banks like Goldman Sachs and Merrill Lynch in formulating its merger.

But there are others who hope that the shares, which will trade under the name "iX London Stock Exchange Dealing Facility", will rise in value. They include the 120 exchange executives who will qualify for share options worth a maximum of £16m under an incentive scheme outlined in iX's merger document.