11 February 2007

LSE set for major tie-up with Tokyo

The London Stock Exchange is in talks with its counterpart in Tokyo to forge a strategic alliance. It follows a similar deal struck by the New York Stock Exchange (NYSE) and the Japanese last week. A spokesman for the LSE said: 'We are holding discussions with the Tokyo Stock Exchange which centre on ways in which the two businesses can collaborate more closely.'

The news comes after analysts predicted that the American Nasdaq exchange would fail to seal its £2.7bn bid to acquire the LSE unless there was an 11th-hour surge in support from investors, predominantly American hedge funds. There was little sign of that happening as markets closed on Friday.

Nasdaq, which holds a 29 per cent stake in London, is unlikely to thwart an Anglo-Japanese alliance. With such a large holding in the LSE, the Americans could, in theory, call an extraordinary meeting in an attempt to sabotage attempts by London to extend its international reach or conclude major deals. But a City source said: 'It would be crazy for the US exchange to undermine its economic investment in the LSE by trying to crimp London's ability to develop internationally - something that would surely be beneficial to all shareholders, including Nasdaq.'

An outline agreement with the Tokyo Stock Exchange is expected to cover areas such as cross-listings, sharing technology and trading systems, and joint marketing. It is possible that the LSE could one day acquire equity in the Tokyo exchange, but that would not happen until the Japanese bourse goes public in 2009. The NYSE, which has merged with Euronext, the pan-European exchange operator, would like to forge even closer links with Tokyo.

LSE chief executive Clara Furse and chairman Chris Gibson-Smith are understood to be determined to push through other alliances in Asia and are looking at opportunities in India and China.

The big question over the coming months is what happens to the LSE's share price. A consortium of investment banks has threatened to set up its own trading platform with the potential to offer lower transaction costs. The initiative, known as Project Turquoise, could affect the LSE's competitive position.

If the LSE's share price falls too far, Nasdaq's chief executive Bob Greifeld may be tempted to sell his stake. Alternatively, he could launch a much lower bid for London than the 1243p-a-share offer on the table until yesterday. But under Takeover Panel rules he cannot bid again for 12 months.

Greifeld is understood to appreciate the irony of an American exchange possibly being prevented from acquiring the LSE by predominantly American hedge funds. 'They were gambling on a higher bid, but in the end, they could not persuade Nasdaq to materially sweeten its offer,' said an analyst.

The LSE is thought to have been holding out for a price nearer 1400p a share.

In the past two years, London has seen off an earlier bid from Nasdaq as well as offers from Macquarie of Australia and Deutsche Borse.

The LSE is planning to return £250m to shareholders, a process that could begin as early as this week.

© Graham Bishop