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Quest for LSE has Americans seeking freedom in Old World
Thursday, March 16, 2006
LONDON -- They began as coffee houses, useful venues to meet and conduct business.
Gossip was the commodity on offer in the embryonic stock markets and it was free, but today it is the venue itself that is being traded and the price, if you take seriously the offer on the table for the London Stock Exchange, is £2.4-billion ($4.84-billion).
This coffee shop is officially for sale; its biggest shareholder, Threadneedle Investments, announced it was ready to talk to potential bidders after Nasdaq made its £9.50-a-share offer last week. The LSE's owners have spotted the hysteria mounting in the pending auction of a trophy asset and they don't want to let the bidders out of the room before the gavel falls. Three Continental bidders -- the Scandinavian OM Group, Deutsche Boerse and the Paris-based Euronext (which would be favoured by LSE officials) -- spent too long gazing at the prize and came to the conclusion it was too expensive.
The Australian, Macquarie Bank, offered £5.80 a share, but that wasn't enough and the U.S. exchange, Nasdaq, has raised the ante by a third. Threadneedle expects that the boys from Wall Street's Big Board will not allow Nasdaq to walk away with the prize and the New York Stock Exchange will step in with a slam dunk.
Still, the stock price climbs and the expectation this week is that a successful offer for the LSE will be something above £12 a share. It's a lot of money for a virtual coffee house, even one that carries the cachet of several centuries of booms, busts and bubbles.
If the U.S. exchanges believe they are buying market share, they are deluded. The London market abandoned its trading floor more than two decades ago and we could be heading for a new market upheaval as the investment banks shift more transactions to in-house trading systems, bypassing the cost structure of the established exchanges.
There are savings to be made from combining technology, more for NYSE than for Nasdaq because the former would acquire the LSE's successful SETs trading system. Still, this is not about technology nor even the promise (probably illusory) of creating a transatlantic stock market duopoly. The real prize for the Americans is an escape from regulatory nightmare to a pleasant offshore financial haven, London, and a foothold in a securities market that is steadily taking business away from New York.
Not long ago, the City Corp. (a municipal body that runs London's financial district) was in a panic about losing market share to Frankfurt. There were fears that trading in EU government bonds would migrate to the Continent as Britain was not part of the single currency. Euronext, the feisty venture that united the Amsterdam, Paris and Madrid exchanges acquired Liffe, the London international financial futures exchange, from under the nose of the LSE.
Instead, the City has gone from strength to strength. London dominates the Eurobond market with 70 per cent of the business and remains the biggest player in foreign exchange, trading $750-billion (U.S.) daily, about a third of the world total. It is the global market place for insurance and shipping. And London is capturing the lion's share of foreign equities, business that Wall Street once regarded as its own by right. The LSE has captured many of the biggest public offerings from emerging markets, business that only a few years ago migrated effortlessly to Nasdaq or, more infrequently, the Big Board.
Why has this happened? Look no further than Capitol Hill, where America's new puritan legislators spend their days strangling Wall Street with a noose of regulation. The infamous Sarbanes-Oxley legislation has erected a barrier against foreign issuers more terrifying than the rudest immigration officer at Kennedy airport.
Nor are the latter helping Wall Street's cause. One obvious point that was not lost on the original coffee house proprietors is that a marketplace needs to be welcoming if it is to thrive.
London has some natural advantages. It is midway between the U.S. and Asian markets, allowing brokers to speak to counterparties in New York and Tokyo at the beginning and end of a working day. It also has a friendly legal system, a preference for self-regulation and, unlike the United States, courts that are not overly accommodating to ambulance-chasing litigators.
If Wall Street has a weakness, it is in its failure to realize that it has one. The battle for the LSE is perhaps its first recognition that the U.S. market is really a bit parochial. It's an inconvenient idea, exposed embarrassingly by senators on Capitol Hill campaigning against foreign ownership. In London, the LSE will be sold to a foreigner, the shareholders will pocket the inflated premium and find another wheel to spin.
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