- The Washington Times - Sunday, February 11, 2007

NEW YORK — The Nasdaq Stock Market Inc., having failed in its $5.3 billion hostile takeover bid for the London Stock Exchange, is now seen scrambling to lay out a European strategy that will appease its shareholders and ensure that it won’t be left behind as other major exchanges consolidate.

The world’s largest electronic equities exchange was dealt a crushing defeat Saturday by LSE shareholders who overwhelmingly opted not to accept the bid. The Nasdaq’s dogged pursuit of the British bourse lasted almost a year and left Nasdaq empty-handed as rival operators NYSE Group Inc. and Euronext NV integrate into the first marketplace to span the Atlantic.

Analysts say Nasdaq Chief Executive Officer Robert Greifeld is now under intense pressure from investors to cut a deal that will keep his exchange competitive. Wall Street could get a glimpse at Mr. Greifeld’s next move when he speaks to analysts after the Nasdaq reports third-quarter earnings tomorrow.

“He’s built up so much expectation that if he were to abandon Europe there would be very strong disappointment among shareholders,” said David Easthope, an analyst with business consulting firm Celent. “Shareholders are looking for them to execute on two strategies: Get your European strategy in place and simultaneously execute one in Asia.”

That’s exactly what the New York Stock Exchange has accomplished. So far this year, the Big Board closed the deal to buy Paris-based Euronext, secured a stake in India’s National Stock Market and embarked on a broader alliance with the Tokyo Stock Exchange that could lead to a combination.

There is also speculation that NYSE Chief Executive John Thain might take advantage of the Nasdaq’s failed bid to make his own run at the LSE, either through an acquisition or most likely a broad alliance. The NYSE, which declined to comment about such a deal, would face competition issues in Europe and be forced to contend with the nearly 30 percent stake in the London exchange that the Nasdaq still holds.

Meanwhile, a spokesman for the LSE told reporters in London that the exchange is already working on a strategic alliance with its Tokyo counterpart.

The fierce rivalry between the NYSE and the Nasdaq is palpable. They are fighting for market share in the U.S., where regulations allow stocks listed on one exchange to be traded on another. They also have been gunning for more stock listings, sometimes persuading companies to defect from one to the other.

The Nasdaq has bragging rights for the speediest stock executions, but the NYSE’s recent introduction of electronic trading is designed to challenge that.

Until Saturday’s defeat, Mr. Greifeld had a string of successes at Nasdaq. He has taken a market that was once run by the nation’s broker-dealers and turned it into one of Wall Street’s hottest public companies, bought electronic trading platform Instinet for its technology and has taken trades away from the NYSE.

“Bob has done a great job for shareholders,” said Glenn Hutchins, a Nasdaq board member whose private equity firm Silver Lake Partners is a major shareholder of the exchange. “He took over an exchange that essentially had no value, and it now has billions. He’s generated a huge amount of volume because it has the best technology and the lowest cost, and is taking market share from the NYSE.”

The Nasdaq, which has pledged to shareholders that it would pursue only deals that were strategic fits and would almost immediately reap shareholder value, stood by its claims that the LSE was overvalued and refused to increase its bid.

Mr. Hutchins would not comment about what the Nasdaq’s next move would be, but he said it continues to be interested in expanding into trading of other investments, such as commodities and bonds, and he didn’t rule out doing so through an acquisition. The U.S. is home to several options and commodities exchanges, including electronic InterContinental Exchange Inc. and Chicago Mercantile Exchange Holdings Inc.

The Nasdaq also has warned the LSE that it might compete with the British market on its home turf. Mr. Greifeld has previously indicated Nasdaq would consider offering its technology to an LSE rival — a consortium of banks known as Project Turquoise is developing a trading platform.

In Europe, Nasdaq still has the opportunity to link up with other exchanges, which include everything from the Deutsche Boerse AG to Nordic exchange operator OMX. Nasdaq has left open the prospect of partnering or acquiring exchanges in Asia and is said to be in advanced talks to buy a stake in India’s Bombay Stock Exchange.

The Nasdaq, meanwhile, isn’t immune from a takeover bid by the LSE or any other suitor.

LSE Chief Executive Clara Furse has repeatedly talked up its independent growth prospects over the past year and said that every pursuit of her company so far has been undervalued. The exchange also has been targeted by Australia’s Macquarie Bank Ltd. and had interest in the past from Euronext.

For both the LSE and the Nasdaq, there is a great need to pick a strategy and execute it, considering the pace of consolidation. Failure to strike a deal would leave them both behind as exchanges move toward a point where trading stocks, bonds, commodities and options can occur around the clock and within multiple time zones.

“It’s a ticking clock,” said Mr. Easthope. “The sooner the better for them to get their strategy in place and decide if they want to partner, build or buy.”

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