There’s no better takeover target than the London Stock Exchange, insists Bob Greifeld. Like his own Nasdaq Stock Market, the LSE mixes electronic matching of orders with market makers who post two-sided quotations in its listed stocks. By acquiring the U.K. bourse, Nasdaq would not only create a single trans-Atlantic market for blue chips, but also supercharge profit margins by merging technology platforms.
“The LSE’s market structure is essentially a carbon copy of Nasdaq’s,” says Greifeld, 49, who’s been Nasdaq’s CEO since 2003. “That creates a huge opportunity for technology synergies.”
That explains why Greifeld fought so long and hard for the LSE, making a $5.3 billion hostile bid in December after his first offer was rebuffed last March. He amassed a 28.75 percent stake in his target and tried to win control by persuading other owners to tender their shares. Several were willing to sell before the February 10 deadline, if Nasdaq would raise its bid. Greifeld refused to budge from his $24.35 per share offer, concerned that impending regulatory reforms could hurt the LSE’s share of U.K. stock trading.
Now all he has for his efforts is a minority stake in what he has said is an overvalued company. Meanwhile, Nasdaq’s arch-rival, NYSE Group, is set to close a $13 billion takeover of pan-European exchange Euronext and has forged an alliance with the Tokyo Stock Exchange, as has the LSE. Even Frankfurt-based Deutsche Börse, after trying and failing to acquire both the LSE and Euronext, has invested in exchanges in South Korea and India. At home, upstarts are attacking the NYSE and Nasdaq. One such rival, 14-month-old BATS Trading, handles about one in 10 Nasdaq trades.
“Bob has painted himself into a corner to some extent,” says one source who knows Greifeld and closely follows the exchange business. “When you consider how the competition is moving forward, failing to acquire the LSE has to be regarded as a huge defeat.”
Worse, investors don’t credit Nasdaq for its LSE stake: subtract its $1.5 billion value from Nasdaq’s $4.7 billion market capitalization, and the company trades at just 13.2 times estimated 2008 profit, less than half the average 29.1 multiple of the other six public U.S. bourses, says Sandler O’Neill + Partners analyst Richard Repetto. Nasdaq’s stock is down 18 percent in the past year, making it vulnerable amid all the industry consolidation. “If you buy Nasdaq right now, you’re getting positions in both LSE and Nasdaq at a steep discount,” wrote Repetto in a February report.
Greifeld has yet to decide whether to sell the LSE shares or make another run [Under U.K. law he can’t bid again for one year]. He’s weighing alternatives like allying with Project Turquoise, a market that would compete with the LSE under liberalized trading rules that take effect in November. He’s also entering two new markets. Nasdaq will begin executing options trades this summer, aiming to capture 20 percent share within “two-and-a-half to three-and-a-half years,” says Greifeld. His other plan: expand Nasdaq’s Portal Market, which lets companies manage private placements of unregistered stock, by adding a trading system.
Both efforts face challenges. Six bourses compete for options trades; the two leaders each control about 30 percent of volume. Greifeld says the recent move to penny options pricing will spur more trades and favor super-fast technology like Nasdaq’s Inet system. The Portal platform must compete with both the LSE’s Alternative Investment Market and New Yorkbased Pink Sheets, which just debuted a new quotation platform, for business from emerging and foreign issuers.
The CEO’s primary focus remains U.S. stock trading, the foundation of Nasdaq’s business because it generates transaction fees, helps attract listings and creates market data for resale. Nasdaq has claimed more volume in NYSE stocks as the Big Board has moved toward electronic trading over the past year, leading some issuers, like E*Trade, to transfer listings from the NYSE. The link betwen trading and listings, though, is also a big reason why Greifeld must combat new rivals like BATS.
“That’s what we’re first and foremost about,” he says of U.S. equity trading. “Nothing else that we do is going to measure up in the return to our shareholders that success in completing that mission will have.”
Nasdaq CEO Greifeld is planning an attack on the U.S. options market
