The Nasdaq's ( NDAQ) multibillion-dollar takeover offer for the London Stock Exchange has many virtues, including a big premium over the stock price prior to the bid and the promise of uniting two leaders in electronic trading. Still, its timing was odd. The unsolicited bid, announced late last week, was rejected by the London exchange, setting the stage for what many expect to be a bidding war with the New York Stock Exchange ( NYX), which is said to be mulling its own offer. Those expectations are based in part on the NYSE's newest takeover weapon: the publicly traded stock created last week when the company completed its merger with Archipelago. That raises a question. Why did the Nasdaq wait until the NYSE was so armed before launching its surprise offensive? "I don't really have a great answer," says Rich Repetto, equity analyst at Sandler O'Neill, adding that the only plausible reason was the time it took to put together a bid. Still, other bidders have been eying the LSE since December 2004, so the Nasdaq had plenty of time to consider its possibilities. Even without the NYSE breathing down its neck, an acquisition of the LSE by the Nasdaq is no slam-dunk. For one thing, the U.S. exchange will have to borrow heavily to finance the purchase, in which it would be swallowing a company with a market cap that is roughly the same as its own. To make matters more difficult, one of the Nasdaq's financial advisers, JP Morgan, dropped out of the deal team on Friday, leaving boutique investment bank Greenhill its lead adviser. A spokesman for the Nasdaq reassured TheStreet.com on Sunday that it wouldn't have any trouble closing a deal. "We are working with a number of international investment banks who are helping us to develop a proposal," he said. "We have several sources of advice and funding support."
Still, on a deal like this, banks will ultimately line up on one side or the other, and with some reports saying that the LSE may favor the NYSE, Wall Street might be inclined to back the Big Board's horse if it comes down to a battle. The Nasdaq reportedly is ready to consider amendments to its current all-cash offer to make the deal more palatable to the LSE. Prior to the bid surfacing, the London exchange had mapped out a fairly aggressive plan to return money to shareholders, and the Nasdaq could try to fashion a deal that allows for some of that plan to be carried out. As the offer stands, LSE shareholders would get about $16.40 a share, or $4.2 billion. The offer price is over 60% higher than one from Australia's Macquarie Bank and 72% higher than the LSE's closing price prior to Macquarie's unsolicited bid last August. Sandler O'Neill estimates the deal is over 30% accretive to Nasdaq's 2007 estimates, and the company could bid 50% more and still turn up in the black. A deal with the NYSE would have its own benefits, however. The exchange would gain similar synergies, while the NYSE has a bigger market cap on which to base its financing. That said, the Nasdaq deal does have some obvious advantages. Besides the high price, the U.S. exchange offers a completely electronic trading infrastructure that should mesh well with the LSE's. The company also has a longer history of being public, and a more established currency that would likely make both debt and equity markets more comfortable in a deal this large. Meanwhile, the NYSE already has an acquisition to focus on. Fresh from a merger with Archipelago, the company will also be tied up with overlap and restructuring in the newly formed NYSE Group.
"There is a little more
integration risk" for the NYSE, says Repetto, noting that the company now has overlap in its trading platforms and elsewhere. To equity markets, it won't matter much who ends up doing a deal. The NYSE's shares ran up $6.75, or 9.05%, to $81.30 in trading Monday. Shares in Nasdaq, although slightly down on Monday, ran up more than 10% on Friday. And with the NYSE's new makeover, the differences between the two companies are becoming less clear. "Either one would make a good partner," says Repetto. "Both are U.S. exchanges. Both are recognized globally and both have pros and cons."