LSE goes from hunter to hunted

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The London Stock Exchange fought off no fewer than five takeover attempts in the last decade. If investors are right, a sixth is coming and the LSE bosses may be in no position to turn it down after so many lost opportunities.

Investors drove up shares in London Stock Exchange Group PLC by 11 per cent on Thursday, one day after the LSE and TMX Group Inc., owner of the Toronto and Montreal exchanges, killed their merger agreement due to a lack of support among TMX shareholders. Suddenly isolated, the LSE has exposed itself to a takeover attempt as the global bourse consolidation game plays out its final rounds.

Analysts and bourse executives say the LSE, led by chief executive officer Xavier Rolet, will have trouble defending a go-it-alone-strategy after it spent almost five months touting the world-beating virtues of a merger with the TMX.

"Given the failure of the TMX deal, we believe it will be difficult for the LSE to defend against a significant premium," analysts at Numis Securities said. "As the proposed TMX deal showed, by virtue of the targeted synergies, the value of an exchange is greater when merged or acquired by another."

In the expectation that it will become prey, UBS AG added LSE to its mergers and acquisitions watch list. UBS said there is a good chance that Nasdaq OMX Group Inc. could offer as much as £11.50 ($17.78) a share for LSE, which closed Thursday at £10.61.

Others weren't so sure the LSE will get snapped up quickly by Nasdaq or any other suitor, for one simple reason: It is not entirely in control of its own fate.

That's because Borse Dubai Ltd. owns 21 per cent of the LSE and Qatar owns 15 per cent, giving the two Persian Gulf emirates a combined 36 per cent of the exchange. If the two shareholders were to work in unison, they could probably block any deal.

In a note, RBC Dominion Securities Inc. analyst Sarah Pikes said the speculation that Dubai and Qatar are now sellers is "off the mark" because the two would lose money if they sold at or near the current market price. Dubai paid £17 a share for its LSE investment; Qatar paid £15.

Nasdaq seems the obvious LSE suitor. In the last decade, Nasdaq made three LSE takeover attempts, each of them repelled by Clara Furse, who was CEO for eight years until Mr. Rolet's arrival in 2009. (Australia's Macquarie Bank Ltd. and Germany's Deutsche Boerse AG also made unsuccessful bids.) Nasdaq's last bid was launched at £12.43 a share, an offer that was, in retrospect, highly generous. LSE shares went under £5 in 2009 and didn't breach £10 until this week, when the takeover speculation hit.

It is widely assumed that Nasdaq is on the prowl after it joint attempt, with IntercontinentalExchange Inc. (ICE), to buy NYSE Euronext Inc. was blocked by antitrust regulators.

An exchange executive who did not want to be identified said he thinks Singapore Exchange Ltd. (SGX) is more likely to buy LSE than Nasdaq. He noted that Nasdaq is carrying a lot of debt, giving it less financial flexibility than Singapore to make a big acquisition. SGX CEO Magnus Bocker, who was president of Nasdaq in 2008 and 2009, wants to take his exchange onto the world stage.

Last autumn, SGX agreed to buy its Australian counterpart, ASX Ltd., for about $8.8-billion (U.S.). The Australian government blocked the deal on national interest grounds in April. At the time, Mr. Bocker said he would pursue other deals.

The exchange executive said that if the LSE does not get snapped up it should pursue a "silo" strategy by combing cash equity trading, derivatives and clearing. The LSE is weak in derivatives and clears through LCH.Clearnet, the world's biggest swaps clearing house.

Nasdaq is seeking a minority interest in LCH, which is 83-per-cent owned by its clients and 17 per cent by various exchanges. The executive said LSE should seek a big stake in LCH and try to nab Liffe, the global derivatives business of NYSE Euronext, if it comes up for grabs.

Deutsche Boerse and NYSE Euronext announced a merger agreement in February and are keen to keep Liffe. Regulators, however, are reviewing the merger and paying special attention to concentration in derivatives trading. Putting the two exchanges together would give Liffe and Deutsche Boerse's Eurex more than 90 per cent of the European Union's exchange-traded derivatives market.

Judging from the soaring LSE stock price, however, it appears that LSE's next move will be evaluating a takeover offer from Nasdaq, SGX or another exchange with international ambitions and the desire to own a prestigious, though somewhat faded, exchange.