Nasdaq bid raises Sarbox fears

The bid – at 950p per share – was a major advance on the 580p offered
previously by Australian investment group Macquarie. However, at the time, it
still only represented an 8% premium on the LSE’s then market price, which
subsequently roared away (exceeding 1,200p at one point, falling to 1,179p at
the time of writing).

In rejecting the offer, the LSE said it undervalued the exchange and the
“very significant synergies that would be achievable” from its combination with
“any major exchange group”. Despite this, the offer appears sufficiently serious
to have interested at least some of the LSE’s major shareholders.

This was the LSE’s fourth rejection of an unsolicited approach in the past 15
months. Nevertheless, it could still consider a merger with Nasdaq, or with
other major markets, such as the New York Stock Exchange or Paris-based
Euronext, which owns the London International Financial Futures Exchange. It
could even acquire OMX, the Scandinavian exchange operator. At this stage, the
identity of a preferred partner – if any exists – is unclear.

Strength in numbers

The potential synergies to be made from a merger are not disputed. Putting
more business across one trading platform could create large efficiencies.
However, the prospect of a merger with Nasdaq, or indeed the NYSE, has
stimulated fears about the Securities and Exchange Commission influencing the
regulation of UK-listed companies. This is despite Nasdaq’s bid proposal that,
although the group would be headquartered in New York, the LSE would remain a
separate British operating company with its own board.

Angela Knight, chief executive of the Association of Private Client
Investment Managers and Stockbrokers (APCIMS), is distinctly worried. “Although
Nasdaq has come up with some sort of construction where you would have a holding
company that owns the LSE on one leg and Nasdaq on the other, in reality that
would not necessarily stop SEC-type requirements crossing the Atlantic,” she
says. “The SEC could say, ‘we want the reporting requirements of UK companies to
be more like Sarbanes-Oxley and if you, Nasdaq, don’t do that, we will squeeze
your US business until you do do it’’. US extra territoriality is well known.”

To be reassured, Knight would require some firm agreement between the UK’s
Financial Services Authority and the SEC about who regulates what. “The people
with the greatest leverage here are the biggest shareholders,” says Knight.
“They seem to have indicated the price [offered by Nasdaq] is quite attractive.
They can use their clout to get the FSA and SEC together to get something that
is more than warm words in place. If we don’t do it now, we will regret it after
the event.” In addition, because many US regulatory requirements are embedded in
law, Knight would like the FSA-SEC agreement to be underpinned with a legal
agreement between the UK and US governments.

Regulatory export

Justin Urquhart Stewart, a director of Seven Investment Management, and a
regular market commentator, is also concerned about the threat of “US regulatory
creep”. He says: “The US has a nasty habit of exporting its regulatory and tax
regimes.” He would not be surprised by the SEC trying to enforce Sarbanes-Oxley
type regulations. “At which point you would hear the sound of pounding feet
rushing away from the LSE,” he says.

The FSA won’t comment on the Nasdaq bid. However, last year, FSA chairman
Callum McCarthy issued a statement to encourage discussion of the potential
implications of any change of LSE ownership. He noted that: “If the LSE remains
a UK exchange under a new parent it will continue to be subject to FSA
regulation as a Recognised Investment Exchange.”

Logically, it would make no sense for a US exchange to invest in London and
then damage its value by increasing the regulatory burden. Geoff Booth,
financial services practice director at Parson Consulting says: “In terms of
making a commercial investment in London, which is what the US would be doing,
it would be unwise to impose a regime that went against the commercial nature of
the investment they are making. If AIM, for example, were squeezed, or put in a
position of being unattractive to organisations seeking an IPO, then the
consequence in the global market would be the emergence of another competitive
market.”

Nevertheless, concern remains. “If Nasdaq says, ‘you are safe in our hands’,
I would have to say, ‘prove it,’” says Urquhart Stewart. “I would need some very
firm assurance that the US regulators wouldn’t start extending their web.”

He would also have some worries about a London merger with Euronext. “The
problem with having a single pan-European market of such a size is that it
doesn’t get any competition,” he says. As Urquhart Stewart warns, stock
exchanges need competition, otherwise their charges can begin to rise.