Tuesday, March 14, 2006

Battle Of The Exchanges
Nasdaq and NYSE Fights Over LSE

Nasdaq made an audacious bid for London Stock Exchange last week. Its offer made Macquarie's earlier bid looking infantile and amateurish. The timing of Nasdaq's bid was also interesting as it was the same week that NYSE went for a listing after being absorbed into Archipelago. Nasdaq has been winning the trading wars being the biggest electronic exchange, while some segments of NYSE still wanted to hold on to archaic sign language to do deals (we know the real reasons don't we, electronics makes it more difficult to screw clients). NYSE's listing was a percursor to admitting that they needed to go electronic in a complete overhaul way before they lose more market share to Nasdaq and the rest.

Nasdaq could afford to bid very high for LSE because Nasdaq trades at a rich 65 times earnings this year. As Nasdaq has always been electronic, its business platform is highly scalable, and LSE makes a very good fit. If one were to look at the number of foreign companies going for depository receipts last year, only one-third went to the US exchanges, the rest mainly opted for London and Luxembourg. If Nasdaq gets LSE, its could spell a long period of demise and diminished stature for NYSE.

Fearing a need to do catch, a substantial shareholder of NYSE called for the company to stay away from entering into a bidding war with Nasdaq for LSE. Frankly speaking, NYSE is not ready to absorb LSE, while Nasdaq has been preying for the last 12 months.

There is only so long the LSE board can say no. If the next bid comes in, and I am sure it will - the pressure will be to OK the bid because it will be getting to stratospheric levels. It will be harder to stay independent. I believe the board members of LSE would now seriously and quickly consider a merged Euro exchange, involving at least Paris-Euronext and Germany's Deutsche Bourse. It makes more sense in a E.U. environment. Once merged, it will be a lot harder for anyone to buyout the entity. In fact, the merged entity will be powerful enough to buyout some of the other commodity exchanges and strike strong alliances.

To make themselves less attractive, LSE has immediately filed documents to return 510 million pounds (US$880 million) back to shareholders, depleting its still substantial cash coffers. Still, board members are still going into talks with Nasdaq on what should happen next. Nasdaq has more leverage and propensity to do the deal as it is scaling up its business platform, while the cost savings will be a good reason to do the deal too. The LSE board would be tempted to join forces with Nasdaq and the entity could also be a cross-Atlantic powerhouse. This will further allow London to thumb its nose at E.U. (if it so chooses).

At the end of the day, Nasdaq cannot afford NOT to get LSE. Money is not an issue for Nasdaq. A Nasdaq-LSE entity will be too formidable especially when foreign companies think of doing depository receipts or even outright listing in a major exchange.

Will the samer fervour happen in Asia? Unlikely, some of the bourses are too nationalistic. The better performing bourses such as HKSE and SGX are too competitive with each other to give each other the time of the day. For HKSE to sell to SGX or vice versa is unthinkable as the "financial center" reputation and flow-on benefits and bragging rights are just too much to even contemplate. Even an alliance between the two will be hard to forge.

The following table ranks the market capitalisation of the respective exchanges as at end of 2005:
1) New York Stock Exchange US$13.3 billion
2) Tokyo Stock Exchange US$4.57 billion
3) Nasdaq US$3.6 billion
4) London Stock Exchange US$3.06 billion (now a lot higher)
5) Osaka Stock Exchange US$2.97 billion
6) Euronext-Paris US$2.71 billion
7) Toronto Stock Exchange US$1.48 billion
8) Deutsche Bourse US$1.22 billion
9) HK Stock Exchange US$1.05 billion
10) Madrid Stock Exchange US$0.96 billion

2 comments:

Rohan_888 said...

I think there is a huge bubble forming around these exchanges, Chicago exchange is 800% up since listing!

At the end of the day, as Warren Buffett wrote, it is the profit that the companies make that counts. Commissions to BM, brokers, fundmanagers etc have to be deducted from the nett profits of the listed companies, which are anyhow not very high.

Salvatore_Dali said...

There is a bubble but its a very tiny one. Yes, its the profits that counts. If you read the papers today, Euronext_paris recorded a tremendous surge in earnings. While Nasdaq is at a rich 65x this year's earnings, it is the biggest electronic exchange globally. They are already leaps and bounds ahead of NYSE and will eat into NYSE's market share gradually. If Nasdaq snares LSE, it would be very synergistic, as it would be a cross Atlantic behemoth, big foreign companies would either be in London or NY, they get the best of both worlds. Just look at the Bursa Malaysia, ask anyone, the volume and performance last year was sluggish at best, many remisiers were eating into their savings - but even so, the Bursa made good money. Exchanges are as close to a monopoly as you can get. The bigger you get, the bigger the monopoly, and the higher will be the obstacles for entry to competitors.