Bob Greifeld’s window of opportunity closed a lot sooner than anyone expected. The Nasdaq Stock Market CEO made a bold £2.4 billion ($4.2 billion) bid for the London Stock Exchange on March 10, hoping to swoop in while other potential suitors were occupied elsewhere. European competitors Euronext and Deutsche Börse were being pressed by their shareholders to merge with each other rather than spend too much money acquiring the LSE. Nasdaq’s archrival, the New York Stock Exchange, had just become a public company through its historic merger with electronic exchange operator Archipelago Holdings and was planning a secondary stock offering for sometime this month. And Nasdaq’s market capitalization had quadrupled in the past year, to nearly $4 billion, giving it a more valuable currency with which to make acquisitions.
“They were taking advantage of the best opening they’d have to own an asset that is extremely prized to them,” says a person familiar with Greifeld’s thinking. (Greifeld and other Nasdaq officials won’t comment.)
But Nasdaq’s bid -- reportedly sent via fax to LSE chief Clara Furse -- was immediately rejected as too low. Investors agreed, bidding up LSE shares to more than £11 ($19) apiece -- nearly 20 percent higher than Nasdaq’s offer of £9.50 -- in a bet that competitors wouldn’t stand idly by and let the U.S. exchange snatch away a coveted asset. But then Nasdaq surprised everyone: On March 30, with LSE shares opening the trading day at £11.20, Nasdaq announced that it had abandoned its takeover effort. It didn’t explain why, but informed sources say that Greifeld wasn’t willing to chase the LSE’s rising price tag.
Nasdaq walked away from a valuable property. As exchanges around the world convert from nonprofit membership organizations into aggressive, publicly owned companies seeking to grow profits by expanding and adding new products, the LSE stands out as a key component of any global strategy. Because the vast majority of U.K. equity trades are executed through the exchange -- and because the liquidity-seeking nature of stock traders makes it extraordinarily difficult for upstart bourses to dethrone established leaders -- acquiring the LSE is considered to be the only surefire way to break into the London market. For this reason, the NYSE and other suitors are expected to weigh their own bids.
“These markets are natural monopolies. The losing bidders can’t respond by going out and buying another competitor,” says Doug Atkin, former CEO of electronic trading firm Instinet Group, who now analyzes exchange stocks for institutional investors as CEO of Majestic Research. “You get one shot. It’s like the LSE is the only piece of waterfront property in town. If Nasdaq gets it, it’s really bad for New York. And if New York gets it, it’s really bad for Nasdaq.”
The problem for Greifeld, 48, was simply that Nasdaq couldn’t afford to pay what its dream house on the Thames was likely to cost. Atkin figures that an LSE acquisition would have been accretive to Nasdaq earnings up to a purchase price of about £12 per share. Pursuing a takeover beyond that price -- a likely requirement if other bidders, like the NYSE, had become involved -- would have required taking on a raft of debt for an earnings- dilutive deal. Financially speaking, the Big Board is in a far stronger position to acquire the LSE: It has a market capitalization more than triple that of Nasdaq and nearly five times as much cash.
And Greifeld is as maniacal about the bottom line as he is fiercely competitive. He won the CEO job three years ago because Nasdaq needed someone to slash runaway spending and focus its dreamy, diffuse business strategy -- skills that Greifeld had demonstrated as a hard-nosed executive vice president at financial technology vendor SunGard Data Systems.
In theory, Nasdaq’s decision to withdraw leaves the door wide open for the NYSE. But with Nasdaq out of the picture, there’s no need for the Big Board to move quickly. Bids by the LSE’s Continental rivals appear to be no more imminent. Within hours of Nasdaq’s March 30 announcement, Deutsche Börse issued a statement proclaiming that it is happily moving ahead on talks aimed at a “merger of partners” with Euronext. The LSE’s shares closed the day down nearly 7 percent, at £10.44.
Don’t count the Big Board out for long, though. The NYSE remains interested in further acquisitions. One senior executive there notes that planning for the integration of Archipelago had been ongoing for months before the deal closed. Executing that merger, then, shouldn’t preclude NYSE chief John Thain -- who has made no secret of his desire to expand globally and into fixed-income and derivatives trading -- from seeking more deals.
“We’re ready to roll,” says the executive, speaking of acquisitions in general but not the LSE specifically. (The NYSE and the LSE decline to comment.)
Still, a deal that spans the Atlantic -- or even the English Channel -- faces significant obstacles, including questions about regulation and whether the Brits could actually stomach selling the treasured LSE to the Yanks, or even worse, to the Germans or the French.
More likely in the near future are less geographically ambitious combinations, such as EuronextDeutsche Börse, that will cut costs for shareholders and exchange users alike.
U.S. derivatives exchanges, including the Chicago Mercantile Exchange, the IntercontinentalExchange and the International Securities Exchange, are frequently mentioned by bankers and analysts in discussions of possible pairings, both with one another and with stock markets. The ultimate irony would be for the LSE, with its share price supercharged by takeover speculation, to play the aggressor in the consolidation game. It’s worth noting that less than one year ago, Werner Seifert lost his job as Deutsche Börse CEO for clinging, against shareholders’ wishes, to an attempt to buy the LSE for less than half its current market value. The London exchange’s shareholders are, however, likely to be just as wary of an expensive acquisition.
“It’s unlikely that the LSE goes on the attack now,” says an M&A banker who is tracking the situation closely. “But it would be delicious.”
