Unwelcome attention

Nasdaq’s bid for the London Stock Exchange has stimulated renewed speculation
about potential exchange mergers, as well as concerns about US regulatory creep.

The bid ­ at 950p per share ­ was a major advance on the 580p offered
previously by Australian investment group Macquarie.

However, at the time it still only represented an 8% premium on the LSE’s
then market price, which subsequently roared away (exceeding 1,200p at one point
and being 1,179p at the time of writing).

In rejecting the offer, the LSE said it undervalued the exchange and its
‘very significant synergies that would be achievable’ from its combination with
‘any major exchange group’. Nevertheless, the offer appears sufficiently serious
to have interested at least some of the LSE’s major shareholders.

This was the LSE’s fourth rejection of an unsolicited approach in the last 15
months. Nevertheless, London could still consider a merger with Nasdaq, or with
other major markets, such as the New York Stock Exchange or Paris-based
Euronext, which owns the London International Financial Futures Exchange.

It could even acquire OMX itself, the Scandinavian exchange operator. At this
stage, the identity of a preferred partner ­ if any exists ­ is unclear.

The potential synergies to be made from a merger are not disputed. Putting
more business across one trading platform could create large efficiencies.

However, the prospect of a merger with Nasdaq, or indeed the NYSE, has
stimulated fears about the Securities and Exchange Commission influencing the

regulation of UK-listed companies. This is despite Nasdaq’s bid proposal that,
although the group would be headquartered in New York, the LSE would remain a
separate British operating company with its own board.

Angela Knight, chief executive of the Association of Private Client
Investment Managers and Stockbrokers (APCIMS), is distinctly worried. ‘Although
Nasdaq has come up with some sort of construction where you would have a holding
company that owns the LSE on one leg and Nasdaq on the other, in reality that
would not necessarily stop SEC-type requirements crossing the Atlantic,’ she
said. ‘The SEC could say, we want the reporting requirements of UK companies to
be more like Sarbanes-Oxley and if you, Nasdaq, don’t do that, we will squeeze
your US business until you do do it. US extraterritoriality is well known.’

To be reassured Knight would require a firm agreement between the UK’s
Financial Services Authority and the SEC about who regulates what.

‘The people with the greatest leverage here are the biggest shareholders,’
she said. ‘They seem to have indicated the price (offered by Nasdaq) is quite
attractive. So they can use their clout to get the FSA and SEC together to get
something that is more than warm words in place. If we don’t do it now, we will
regret it after the event.’

In addition, because many US regulatory requirements are embedded in law,
Knight would like the FSA-SEC agreement to be underpinned with a legal agreement
between the UK and US governments.

Justin Urquhart Stewart, a director of Seven Investment Management and a
regular market commentator, is also concerned about the threat of ‘US regulatory
creep’. He said: ‘The US has a nasty habit of exporting its regulatory and tax
regimes.’ He would not be surprised by the SEC trying to enforce Sarbanes-Oxley
type regulations. ‘At which point you would hear the sound of pounding feet
rushing away from the LSE,’ he said.

The FSA won’t comment on the Nasdaq bid. But last year Callum McCarthy, FSA
chairman, issued a statement to encourage discussion of the implications of any
change of LSE ownership. He noted that: ‘If the LSE remains a UK exchange under
a new parent it will continue to be subject to FSA regulation as a Recognised
Investment Exchange.’

Logically, it would make no sense for a US exchange to invest in London and
then damage its value by increasing the regulatory burden.

Geoff Booth, financial services practice director at Parson Consulting,
noted: ‘In terms of making a commercial investment in London, which is what the
US would be doing, it would be unwise to impose a regime which went against the
commercial nature of the investment they are making. If AIM, for example, were
squeezed or put in a position of being unattractive to organisations seeking an
IPO, then the consequence in the global market would be the emergence of another
competitive market.’

Nevertheless, concern remains. ‘If Nasdaq says, you are safe in our hands, I
would have to say, prove it,’ Urquhart Stewart commented. ‘I would need some
very firm
assurance that the US regulators wouldn’t start extending their web.’
He would also have some worries about a London merger with Euronext. ‘The
problem with having a single pan-European market of such a size is that it
doesn’t get any competition,’ he explained.

As Urquhart Stewart warns, stock exchanges need competition, otherwise their
charges can begin to rise.

This article appeares in the latest issue of our sister title, Financial
Director