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Nasdaq, TSX, Cyberpresse, Cyberpresse.ca

DEALTALK-Nasdaq's Greifeld must hit right note for LSE

Nasdaq OMX boss Robert Greifeld will have to pay up and play his hand carefully if he wants to nail a third attempt to buy the London Stock Exchange (LSE) .

And should that fail, a consolation prize could well be London-based smaller new entrant Chi-X, whose exclusive merger talks with U.S. peer BATS have become mired in a UK regulatory investigation.

The 53 year-old New Yorker, who last bid 12.43 pounds per share for the LSE in 2006, is likely to have to pitch a new bid at around 15 pounds per share, valuing the LSE at around 4 billion pounds ($6.4 billion), some analysts say.

Greifeld has yet to prove he can secure a high-profile takeover. His failed attempts to secure the LSE were followed by thwarted bid attempts for both Chi-X and cross-town rival NYSE Euronext .

But LSE shares have surged nearly 25 percent to a year-high of 10.73 pounds on market hopes he will make another play for the LSE, which saw its own merger attempt with Canada's TMX derailed by shareholder opposition last week.

The LSE management is certainly unrecognisable from that which so vehemently rejected Nasdaq's overtures five years ago, though Chris Gibson-Smith, who led the LSE's defence in 2006, remains the chairman of the exchange group.

Current LSE boss Xavier Rolet, who replaced Clara Furse in 2009, is seen as more pragmatic than his predecessor, who refused to entertain any of the numerous bids for the British exchange during her eight-year tenure.

Most importantly, a merger makes basic sense for both exchanges at a time when their two main rivals, Deutsche Boerse (DB1Gn.DE) and NYSE Euronext, are forging ahead with their merger plan to create the world's largest exchange group.

"I think Nasdaq is frightened enough to make something happen," said one London-based head of trading. "They are anxious to get back into it, and I think they will get Chi-X at least and the LSE at best."

IN THE SAME BOAT

Nasdaq and the LSE have both struggled with greater competition in their most lucrative business lines.

Nasdaq's share of U.S. equity trading has fallen by 10 percentage points to less than 20 percent over the last three years, while the LSE's share of the much smaller UK market has slipped to 50 percent from 85 percent in mid-2008.

The challenge for both groups is to invest heavily in technology to make their platforms more competitive in terms of speed and cost.

The merger partners would be able to migrate their trading systems on to a single technology -- they would have Nasdaq's Genium and the LSE's Millennium to choose from -- in the hope of further driving down costs.

A merger would also take the LSE into North America -- a selling point when LSE management was trying to win support for its aborted TMX bid -- while the deal would boost Nasdaq's European presence.

The deal makes less sense, however, in terms of the LSE's ambitious plans to move into European derivatives and clearing, areas where Nasdaq arguably lags rivals.

Ultimately, the structure of any Nasdaq proposal will be crucial if Greifeld is to win shareholder support.

SHOW ME THE MONEY

After the LSE's share price rally, both companies' market price is around $4.6 billion.

As hostile takeovers are notoriously risky in a sector in which domestic exchanges are often considered national icons, the pressure is on to secure a friendly deal.

The U.S. exchange has shown it is willing to pay $7 billion for an exchange deal -- its share of the planned joint takeover of NYSE Euronext with the Intercontinental Exchange that was put on ice just three months ago.

But a likely option is a stock and cash deal, with Nasdaq holding the balance of power and its shareholders taking the lion's share of newly issued stock.

This was the arrangement that Rolet and the LSE proposed in its bid for TMX, so the exchange may open itself up to claims of hypocrisy if it rejects an offer that has the LSE as the junior partner in what will likely be pitched as a "merger".

The LSE management could be averse to a lop-sided merger, but there is a simple remedy, egos permitting.

"The only way this is going to happen is if Greifeld takes the role of chairman and lets Rolet run the show, which would allay fears about power moving to New York," said one senior banker at a large investment bank.

National opposition would be diluted by a merger proposal while U.S. and UK regulators, who would need to pass the deal, are unlikely to have serious objections due to the lack of overlap between the two firms.

The LSE's shareholders, including Borse Dubai and the Qatar Investment Authority, which own over a third of LSE shares between them, are a different story, however.

They will be looking for a good slug of cash and a premium in return for their support. Read More