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The Anglo File: London Exchange Scraps Deutsche Boerse Merger Plan

The move opens the door to other alliance jockeying by European exchanges and Nasdaq.
Author:

LONDON -- The

London Stock Exchange

withdrew earlier today from its planned merger with

Deutsche Boerse

, scrapping plans to join forces and create a new, pan-European exchange called

iX

.

The merger's failure now opens the door to competing European exchanges to create new alliances or, in the case of Sweden's

OM Gruppen

, to push ahead with its bid for the LSE. It's not clear how the failure of the Anglo-German marriage will affect the

Nasdaq Composite Index's

plans to join in iX.

However, British press reports have suggested Nasdaq could join with OM Gruppen in bidding for the LSE. Scott Peterson, director of media relations for Nasdaq, would not confirm these reports. "I have no comment on that," he says. "We have great respect for the London Stock Exchange and the Deutsche Boerse and will continue to work with both of them as we pursue a global platform."

Deutsche Boerse also kept mum after the LSE announced it was withdrawing from the merger. The German exchange only put out a statement saying that it regretted the LSE's decision.

The LSE's move did not come as a total surprise, as criticism of the plan had grown steadily from all sides since it was first unveiled in May. Many of the LSE's shareholders openly questioned what was in it for them. But the LSE steadfastly maintained that it remained in favor of iX, even after it received a hostile bid from OM Gruppen, which was squarely aimed at sinking the deal.

The Swedish marauders seemed to play fully on the fears of those skeptical about iX's benefits, claiming that the LSE was being sold off far too cheaply. OM offered LSE shareholders 0.65 new OM Gruppen shares and

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7 in cash for each LSE share held, which valued the exchange at around

820 million ($1.15 billion) on Sept. 8.

In its statement announcing that the deal was off, the LSE maintains that "cross-border consolidation of European exchanges, leading to an enlarged pool of liquidity and catalyzing essential cost reductions in clearing and settlement, is in the interests of investors, issuers, intermediaries and shareholders."

However, it says it decided to withdraw the merger plan to focus its attention wholly on what it describes as "the inadequacies for shareholders and customers of the hostile bid from OM."

Today's development follows a decision by the Deutsche Boerse Monday to suspend a membership vote on the merger that was scheduled for this Thursday. At that time, Deutsche Boerse said it was "keeping all options open," perhaps indicating that it knew of LSE's decision this afternoon.

Today's decision comes before the LSE's annual general meeting scheduled for Thursday. This promises to be a lively affair, with some suggesting that LSE chief Don Cruickshank -- who is widely respected for his report into U.K. banking, but who has looked increasingly out of his depth with regard to understanding all the complexities of the equity markets -- may not even have his appointment ratified by the exchange's shareholders.

Cruickshank says: "Not enough of the issues raised by cross-border consolidation have been resolved, and there is now too little time to build confidence that they would be resolved if the merger went ahead. There is very real value in the LSE, even though it has had so few months of life as a commercial for-profit company." The LSE was publicly floated at the end of July, and its shares trade on a matched-bargain basis through the brokerage

Cazenove.

The LSE appears confident that it can stave off the bid by OM. "When the OM offer has been seen off, the board, in full consultation with shareholders and customers, will review the means by which London's pre-eminent role in European equities trading can best be promoted in both their interests," says Cruickshank.

Deutsche Boerse's statement said nothing of what it planned to do, except to say, like the LSE, that "a merger would have marked an important step in the consolidation of European capital markets and would have enhanced shareholder value of both organizations."

Nevertheless, reports in several newspapers on Tuesday claimed that Deutsche Boerse is preparing to make a

1 billion counterbid for the LSE to keep the iX dream alive. Since OM's bid is generally accepted to be too low and was merely seen as a spoiling tactic, such a move by the Deutsche Boerse would not come as a complete surprise.

Whatever happens, though, the whole affair is another example of how Europe remains a hard place to get agreement on anything with a minimum of fuss.

TheStreet.com's

sister site,

TheStreet.co.uk

, contributed to this report.