Markets – London fighting for independence

The fight for control of the London Stock Exchange (LSE) continues with claims and counter-claims, stock raids and complaints about transaction pricing. But are these the last spasms before the global equity markets change forever?

This week the LSE unveiled record third-quarter 2006 results. Revenues in December were up 20% and pre-tax profits for the quarter rose 10%. This capped a record year for trading on SETS, the LSE's automated trading system, with annual trades on the order book increasing 52% on previous year to 78.2 million trades, and the value traded increasing by 44 per cent to £1.5 trillion. The LSE took advantage of these figures to issue a further rebuttal to its suitor, NASDAQ, claiming their offer seriously undervalued the LSE and ignored its "unique strategic position".

NASDAQ responded with comments that historic results were no guarantee of future benefits and accusing the LSE of complacency and milking its users. It said "the LSE fails to acknowledge growing customer dissatisfaction, new competitive threats introduced by upcoming regulatory changes, or accelerating consolidation of the exchange landscape".

A further significant factor in the battle is the acquisition of control of just over 10% of LSE shares by US corporate raider, Samuel Heyman. This holding entitles him to call an extraordinary general meeting to force the LSE into talking to NASDAQ if he so wishes. So far Heyman has not made his intentions known and he is unlikely to sell at the current NASDAQ offer price of £12.43, having bought, at least some of, his holding at £12.90. But who knows how a higher bid from NASDAQ would influence him? Together NASDAQ and Heyman would control nearly 40% of LSE shares and cooperation between them should not have problems bringing in the final necessary investors.

Can the LSE hold out? When the above activities are combined with a growing dissatisfaction within the large investment banking clients of the LSE regarding tariffs, the high costs at LSE compared with NASDAQ, and insecurity in the face of MiFID-driven changes and new players such as Equiduct and Turquoise, it seems unlikely.

In separate events this week, the New York Stock Exchange (NYSE) announced that it had acquired a stake in India's National Stock Exchange, and the Chairmen's Committee of the Euronext regulators yesterday approved the proposals for the Euronext / NYSE merger. This was subject to additional approval from national regulators, but it would be surprising if there were any further issues there.