After seeing off five takeover approaches in two years, the London Stock Exchange (LSE) has turned the tables.
The UK exchange is merging with Borsa Italiana, its Italian counterpart, in an all-share deal that values the combined group at €5.8 billion (Rs31,900 crore). A deal looks sensible, both as a defensive move and a strategic one.
But much hinges on the reaction of Nasdaq, the US rival that’s also LSE’s biggest shareholder. Nasdaq’s own offer for LSE was rebuffed in February. It can’t now make another until next year. An LSE-Borsa deal doesn’t put the UK exchange out of reach, but it does give them more bargaining chips if Nasdaq returns.
Merging with the Italians will help the UK exchange diversify away from equity trading and get exposure to the faster-growing derivatives market—as well as diluting Nasdaq from 30% to around 20% in the process.
What can Nasdaq do? Its stake isn’t big enough to block the deal, which only needs 50.1% acceptance. But the merger’s all-share nature means Nasdaq can still affect the outcome. If it looked like Nasdaq might sell out—as its reported decision to invest in Turquoise, a platform designed to rival LSE in the UK, suggests it might—LSE’s share price would probably fall. That would reduce the price the Italians get. That might not stop the banks who control Borsa backing the deal. They recently rejected an offer of around €2 billion from Euronext, say people familiar with the situation. The €1.6 billion now on offer values the Italians at a 25% discount to LSE, on a multiple of last year’s earnings. That suggests price isn’t their top priority.
A key attraction of the tie-up isn’t the value of shares they get, but the fact that Borsa will get five of the 12 board seats in the merged company.
The companies said they expected to create cost savings worth €29 million a year by 2010, and further revenue synergies of €29 million by 2011 through cross-marketing services to customers, and using the AIM secondary market model to develop Italy’s small and medium-sized business sector.
Fear of Nasdaq clearing off might upset other LSE shareholders, though. Sure, the lower the LSE shares fall, the less it pays for Borsa. But remember that many LSE shareholders bought in when the exchange was a takeover target.
They have a say too—and they may be less than thrilled at seeing their shares lose value now, in return for a pretty modest €58 million in annual synergies a few years down the line.