Nasdaq, Deutsche Börse and NYSE: who will finally win over the LSE?

The protracted battle to take over the London Stock Exchange (LSE) has got bloody. And thanks to the New York Stock Exchange's (NYSE) decision to merge with Paris-based Euronext, the future of the LSE is now more uncertain than ever before.

The NYSE, touted as a potential suitor for the LSE, agreed last week an offer comprising e21.32 (£14.58) per share in cash and 0.98 of a share in the new combined NYSE/Euronext with the pan-European exchange. The merged entity will be the world¹s first transatlantic exchange, with a market capitalisation of e15bn (£10.28bn).

Euronext unveiled plans to take over the LSE in February 2005, a month after Deutsche Börse announced a preconditional 530p-a-share offer. Both offers, together with one from Macqurie Bank, were rejected by the LSE board (see timeline).

The NYSE's bid for Euronext came hot on the heels of a share-and-cash offer from Deutsche Börse. However, the offer was immediately, rejected with 54 per cent of Euronext's shareholders voting against a resolution favouring the tie-up with the German exchange proposed by rebel UK-based hedge fund TCI. Nevertheless, Deutsche Börse is fighting back and may well return with a higher offer for Euronext.

The two-way tussle for Euronext is being watched very closely by the Nasdaq and LSE camps. Nasdaq, which is being advised by Skadden Arps Slate Meagher & Flom, withdrew its indicative offer of 950p a share for the LSE on 30 March after it was rejected.

However, the New York-based technology bourse continued to build a stake in the UK exchange throughout April and May and has amassed a 25.1 per cent stake in the LSE.
Strategically, Nasdaq's stake in the LSE is very significant because it can potentially prevent a takeover by a third party by blocking a scheme of arrangement or by refusing to sell its stake to a future bidder. (A bidder needs to acquire a 90 per cent stake in the target company before it can squeeze out minority shareholders.) The question everybody is asking is: in light of the tie-up between Nasdaq¹s principal rival the NYSE and Euronext, will Nasdaq launch another offer for the LSE?

Under the rules of the UK¹s Takeover Code, Nasdaq will only be able to re-enter the battle within six months of withdrawing its indicative offer if the LSE's board recommends its bid, or in the event of a third-party offer.
But one partner close to the deal argues that it will be unwise for Nasdaq to launch a fresh bid until October so that the technology bourse is not forced to make an offer based on the £12.35 per share it paid for the stake it bought last month.

Financially, Nasdaq may not be able to afford the remaining 75 per cent LSE stake. Some ratings agencies are reported to have criticised Nasdaq, which is highly leveraged, for over-stretching its balance sheet in order to buy LSE shares and have downgraded its debt to Œjunk¹ status. Indeed, if the debt burden gets too high, Nasdaq may even have to sell its LSE stake.

Another scenario is now that the NYSE and Euronext have agreed to tie the knot, Deutsche Börse could potentially launch a fresh bid for the LSE.

Finally, even if the NYSE gobbles up Euronext, a potential takeover offer by the NYSE for the LSE should not be ruled out either.

Competition issues will clearly be a factor in determining the victors of the ongoing battle. However, it is anybody¹s guess as to whether antitrust issues will drive consolidation or indeed hamper any potential deal. One partner argues that, because a merged NYSE/Euronext would create a monster, the Competition Commission may even bless a tie-up between the LSE and Deutsche Börse.
When The Lawyer interviewed LSE head of legal Catherine Johnson recently (3 April), she remained tight-lipped about the bourse's defence tactics.
Nevertheless, what is very clear is that the LSE has played a very gutsy game of brinkmanship, which has so far paid dividends.

Indeed, from an LSE shareholder's point of view, chief executive Clara Furse's tactics have paid off. At the time The Lawyer went to press, the LSE's share price was riding high at £11.24. In stark contrast, Deutsche Börse¹s bid for the LSE in January 2005 was for just 530p a share.
'If I were an LSE shareholder, I'd
certainly be very happy. So in that sense [the LSE management] have done a bloody good job. The question is whether they've done a good job strategically,' says one source.

The battle is likely to drag on for months and will most certainly keep us on the edge of our seats until the bitter end. And like any good cliff-hanger, whether the LSE remains independent or flies under a US or German flag is anybody¹s guess.