M&A Deals for the London Stock Exchange

The London Stock Exchange has been a popular acquisition target. In recent years, bidders from Australia, Paris, and Germany have made takeover offers. More recently, the Nasdaq market made a bid to acquire the London Exchange. With the ongoing interest in the LSE, it is worth taking a moment to examine

The Nasdaq Stock Market Inc. proposed a $4.2 billion merger with the London Stock Exchange, offering a deal that would create a cross-Atlantic exchange with 6,000 stocks having a market value of $7 trillion. The LSE rejected the offer. Nasdaq isn't the UK-based exchange's only suitor. Over the past few years, the LSE has received and rejected offers from Deutsche B?rse, the German company that operates the Frankfurt Stock Exchange; Euronext, an electronic exchange based in France; and Macquarie Bank, an investment banking firm based in Australia.

So far, the LSE has refused all advances. But the exchange is growing and interest in it is likely to continue. The value of the LSE increased threefold over the last three years, to a total of about $5 billion, according to a BusinessWeek report. Investors have been buying up LSE shares, hoping for either a sweetened bid from Nasdaq or an offer from the New York Stock Exchange. While the NYSE has not formally expressed interest, John Thain, CEO of the NYSE, has stated that the historic New York exchange will need to ally with an exchange in Europe to stay ahead of global consolidation in the industry.

There are a number of factors that make the London exchange popular. The LSE is certainly successful. The exchange operates as a natural monopoly for London-based trading in British stocks. According to LSE officials, the exchange's earnings for the first nine months of its current fiscal year rose about 43 percent, with overall revenues up 16 percent.

Another factor that has the attention of US exchanges is the LSE's growth in new listings. The LSE is growing from new stock listings from companies outside the United Kingdom, placing it in competition with international exchanges. Operating outside of cumbersome US regulations such as the Sarbanes-Oxley Act makes the LSE attractive to US companies seeking an alternative place to list their shares. Other markets, such as China and Russia, have also recently favored listing on the LSE over US exchanges.

As investors buy larger stakes in the LSE, its stock value increases, making a potential sale more costly for the buyer but more profitable for the exchange's shareholders. While shareholders have rejected several recent offers for the LSE, climbing prices have made them more willing to consider deals. Threadneedle Investments, the largest shareholder in the LSE, stated that the market price was beginning to reflect the exchange's real value and that Threadneedle would be willing to consider supporting deal offers. Scottish Widows, another large LSE shareholder, also indicated that it would be willing to discuss takeover proposals.

Many LSE shareholders favor the possibility of joining with a US exchange, but such a deal would have to be carefully structured to preserve the operating differences that are currently drawing companies to list in London instead of New York. When it comes to accounting standards and regulatory oversight, international companies will not want to be forced to conform to US standards.

Securities regulators from the United States and the United Kingdom met to discuss regulatory implications of a possible merger between the LSE and a US company. John Tiner, the head of Britain's Financial Services Authority, stated that he saw no regulatory obstacles to such a business combination. Christopher Cox, the chairman of the US Securities and Exchange Commission stated that regulators would have to examine any proposed deal. The structure of the deal could be significant. A US holding company, for example, could own both US and foreign markets and operate them primarily under their local rules, but the holding company itself would be subject to SEC regulation. Any merger with the LSE would likely include some merging of business operations, however, which would make regulatory oversight more complex.

The LSE isn't the only exchange involved in deal activity. Euronext, a European exchange, has announced it would pursue a strategic combination with German exchange Deutsche B?rse. The New York Stock Exchange, flush with cash from its recent initial public offering, has stated that it will seek strategic transactions. Nymex, which operates the New York Mercantile Exchange, has approved the sale of a ten percent stake to private equity firm General Atlantic for $160 million, a move that may set the stage for a public offering later this year.

The possible combination of the London Stock Exchange with a US stock market has been cited as one of the driving forces behind merger talks for Euronext and Deutsche B?rse. Early talks between the companies were plagued by political disagreements, including questions of which company would be the senior partner and where the combined company's headquarters would be located. But the possibility that Europe's largest share market, the LSE, will combine with another large market has driven Euronext and Deutsche B?rse back to the bargaining table in order to remain competitive. Political leaders in France and Germany have also spoken out to encourage the merger, a notable event in a time of increasing national economic protectionism in Europe.

While only time will tell whether the 205-year old London Stock Exchange will enter a merger agreement with another exchange, the possibility appears to be growing more likely. Increased international competition is driving consolidation in the industry, and shareholders appear more willing to entertain a merger offer as the LSE's share value increases. An international deal will certainly face regulatory challenges, but US exchanges seeking to recapture market share lost to international competitors will be willing to make the attempt, as the Nasdaq's recent offer clearly illustrates.

Sources: Business Week, Forbes, MarketWatch, New York Times