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Shotgun Wedding for Nasdaq, Instinet?

Some say it's the best option for the money-losing trading platforms.

Many a range war was ended through symbolic marriage, and there's growing indication that marriage could be the best route for the long-feuding

Nasdaq Stock Market





With both trading platforms bleeding red ink, some say a merger between the two institutions makes sense, enabling them to fight off other electronic trading platforms that are stealing market share.

"I think there's a possibility

Nasdaq could merge with either


or Instinet. It makes sense from a standpoint that you build liquidity and try to take out a competitor," said Richard Repetto, an analyst with Putnam Lovell Securities. "I think Instinet is setting themselves up to be sold."

Badly Kept

It's no secret on Wall Street that the two companies have begun to put aside their differences and had several informal conversations about the possibility of joining forces. Nasdaq officials also are believed to have had talks with another electronic competitor, Archipelago.

Those overtures could gain new urgency if the

Securities and Exchange Commission

rejects Nasdaq's application to divorce itself from the NASD and operate as a free-standing stock exchange.

The application is critical to Nasdaq's plan to gain greater control over the trading activity in Nasdaq-listed stocks and give a badly needed lift to its $107 million SuperMontage trading system, which was launched late last year, but has yet to live up to its hype. Exchange status also would enhance Nasdaq's ability to raise money through an initial public offering because the market will no longer be tied at the hip to the regulators at the NASD -- which still owns a big chunk of Nasdaq.

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But the conventional wisdom on Wall Street is that the SEC will reject the application, which was filed nearly three years ago, and that that will further delay Nasdaq's IPO dreams.

Officials from Nasdaq and Instinet declined to comment. A spokeswoman for Chicago-based Archipelago said she's not aware of any talks with Nasdaq and that "nothing is on the table."

Lion's Share

Between them, Instinet and privately owned Archipelago process and execute more than 40% of the daily trading activity in Nasdaq stocks -- business that's been stolen away from the Nasdaq market.

The denials from Nasdaq and its rivals haven't stopped securities experts and the handful of Wall Street analysts that cover Instinet and Nasdaq -- which trades a smattering of shares each day on the over-the-counter bulletin board under the ticker symbol "NDAQ" -- are openly speculating about a possible deal. (The outstanding shares are the result of a 2000 private placement that unlocked in June 2002.)

"They all are either just scraping by or bleeding slowly, so clearly some kind of strategic move makes a lot of sense," said James Angel, a finance professor at Georgetown University School of Business, who has studied the workings of the Nasdaq market.

Charlotte Chamberlain, a Jefferies analyst, said a merger between Nasdaq and one of its electronic rivals would "make huge economic sense." In a recent research note, Chamberlain said that with little evidence of an earnings turnaround at Nasdaq, it's time for management to consider "whether the time is right for an acquisition."

Tough Market

The grim numbers at Nasdaq and Instinet speak volumes about why a merger could be in the cards.

Over the first six months of the year, Nasdaq lost $46 million, while Instinet rang up $39.5 million in losses. Even worse, revenue at Nasdaq fell 34% to $317 million from a year earlier. The revenue slide at Instinet was not as severe, declining 2% to $525 million.

But the red ink at Nasdaq and Instinet looks all the worse in comparison to the relative good tidings at the

New York Stock Exchange

, which just awarded a whopping $140 million deferred compensation package to its chairman, Richard Grasso. The Big Board, during the first half of the year, earned $27 million, a 30% rise over the same period last year. Revenue at the NYSE was pretty much unchanged at $539.5 million.

Additionally, the stocks of both Instinet and Nasdaq have been duds since making their debuts in 2001 and 2002, respectively.

At $4 a share, Instinet's stock has fallen roughly 80% from its first day of trading, after being partially spun off in a $450 million IPO by



. Meanwhile, the price of Nasdaq's stock, currently $7.20, has been cut in half since shares began trading in July 2002. The slide in Nasdaq's stock has reduced its market cap from $1.1 billion to $564 million.

But the irony is that the erosion in the value of Nasdaq's stock comes at a time that investors are pumping more money in the tech stocks that dominate the Nasdaq market.

The Nasdaq Composite is up 24% since the day Nasdaq shares began trading on the bulletin board.

Investor indifference to Nasdaq shares is one thing that some say could make it difficult for the Nasdaq to acquire one its rivals. Chamberlain said the depreciation in the price of Nasdaq stock limits its ability to use it as a currency.

But investment bankers suggested that a possible deal between the Nasdaq and Instinet could be financed with money raised from private investors. A banker said such a merger is intriguing enough that it would have little difficulty attracting outside equity investors.

Tell Tale

Nasdaq's new management team, led by CEO Robert Greifeld, has begun taking the kind of cost-cutting steps that often precede a merger. In the two months he's been on the job, Greifeld has eliminated 80 jobs and is angling to ax another 300 positions, analysts said. He's also cutting some of Nasdaq's unprofitable overseas operations in Europe. This week it's pulling the plug on Nasdaq Deutschland, its German counterpart.

Still, others contend that even with the cost cuts and a possible merger, Nasdaq's fortunes won't revive until there's full-fledged revival on Wall Street. Despite the run-up this year in Nasdaq stocks, some said the market's biggest problem is that it has lost the sex appeal it had during the bull market of the 1990s.

Indeed, the three-year bear market has taken a big bite out of Nasdaq's listing business. Currently, there are 3,536 stocks that trade on the Nasdaq, down 27% from March 2000. This year there have 20 IPOs on the Nasdaq, compared with 51 for all of last year and 485 in 1999.

"A merger with Instinet or Archipelago won't address a fundamental problem, which is Nasdaq's lack of cache," said Bill Singer, a New York securities lawyer who often represents small brokerages and Nasdaq traders. In the 1990s, he said, "There was a buzz about the listed companies on the Nasdaq."