Nasdaq: London Calling

Speculation mounts that Nasdaq is ready to move on the London Stock Exchange.
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Nasdaq Stock MarketI:IXIC executives were holding their breath on Thursday that they would make it through an entire conference call without any questions about the London Stock Exchange.

They almost made it.

In the last question of the hourlong call to discuss third-quarter earnings, one participant wondered about Nasdaq's opportunity and timing for financing acquisitions. It was a roundabout way of asking when Nasdaq might resume its push to acquire the LSE, of which the Nasdaq already owns a 25% equity stake.

But Robert Greifeld, Nasdaq's president and CEO, refused to take the bait.

"I will just say this: We continue to be very pleased with our investment in London," Greifeld says. "We recognize that global consolidation is a marathon not a sprint."

As consolidation grips the exchange sector, investors and analysts have been waiting for the 35-year-old tech-heavy electronic exchange to try its hand again at an offer for the LSE, which last March rejected a $4.2 billion bid from the Nasdaq. Together, the cross-seas exchange would create a market for trading stocks of 6,266 companies with a combined market cap of $7.3 trillion.

Speculation is mounting that the time for the Nasdaq to move is fast approaching, now that the

Chicago Mercantile Exchange

(CME) - Get Report

has stirred up the trading pits with its $8 billion friendly bid for crosstown rival Chicago Board of Trade. The combination will create the world's largest derivatives and futures exchange.

Josh Elving, an analyst with Piper Jaffray, says Nasdaq's better-than-expected third-quarter profit report "might help in getting London to the table to talk about a partnership."

On Thursday, Nasdaq posted a 69.7% gain in third-quarter profit. In the quarter, Nasdaq earned $30.2 million, or 22 cents a share, up from $17.8 million, or 16 cents a share, a year ago. Revenue rose 83% to $403 million.

The big earnings number gave a boost to Nasdaq's shares, which closed Thursday up $1.21, or 3.5%, to $36.21. For the past several months, Nasdaq shares have lagged those of its main U.S. rival,

NYSE Group

(NYX)

, the parent of the New York Stock Exchange.

But Greifeld tried to downplay the speculation about a deal with the LSE. He says that the Chicago Merc's combination with

CBOT Holdings

(BOT)

, the Chicago board's parent, will have not have any impact on Nasdaq's growth plans.

Rich Repetto, an analyst at Sandler O'Neill, agrees. He doesn't expect any deal between the Nasdaq and the LSE before the spring. The Nasdaq is likely to wait until after March so that it could potentially purchase the LSE for less than the minimum $3.7 billion than it would have to pay for the rest of the LSE, according to British corporate takeover rules.

Repetto says time is on the Nasdaq's side. Shares of the LSE will "trade down as we approach March 2007, because investors will likely fear the floor bid going away," Repetto writes in a note. At the same time, "LSE shareholders will become increasingly dismayed with LSE management if they continue to refuse to negotiate."

In September, Nasdaq was cleared from U.K. regulatory restrictions to make another bid for the overseas exchange. If a bid is set forth in the next five months, the Nasdaq must pay at least 1,243 pence a share for the LSE's remaining stock -- the price per share that the Nasdaq paid to acquire a 25% stake in the exchange earlier this year.

Some say the Nasdaq is reaching too far away into order to build its competitive stance.

"Exchanges need to be responsive to the local economic environments," says Brendan Caldwell, a portfolio manager with Caldwell Asset Management that owns a small position in the Nasdaq. "You can't have an organization that is going to be responsive to both," the U.S. and Europe.

The Nasdaq "should really focus on a complete product offering here for domestic

customers, rather than worrying about making cultures mesh when there is not a natural fit," Caldwell says.

He notes there are plenty of acquisition opportunities in the U.S. for the Nasdaq to focus on. Caldwell points to smaller exchanges such as the

Intercontinental Exchange

(ICE) - Get Report

,

International Securities Exchange Holdings

(ISE)

and

Nymex

, the parent of the New York Mercantile Exchange, could be prime targets if the Nasdaq wanted to expand into derivatives and futures contracts. The Nymex recently filed an IPO. (Caldwell's firm owns shares in the ICE and the ISE).

But other observers say Nasdaq's part in global consolidation is inevitable.

Nasdaq's "direction has to be in somehow automating trading in other small countries' markets," says Ivan Feinseth, an analyst at Matrix, an investment advisory firm in New York. "There are a lot of stock markets around the world that all need the liquidity and distribution and technology that Nasdaq provides."

Japan's Jasdaq Securities Exchange could be one example. The two exchanges signed a memorandum of understanding last Friday "to explore areas of mutually beneficial and meaningful cooperation with a view to reaching definitive agreements in the future," according to a joint press release.

"I don't know that Jasdaq would be that material a partner, but it's an indication of their willingness to expand beyond Europe," says Elving, the Piper analyst.