When in December 2004, Deutsche Borse offered 510p a share to buy the London Stock Exchange, many thought the UK’s premier stock exchange’s days as an independent company were limited. But Clara Furse, the company’s formidable CEO, vowed to fight on, saying the German bid grossly undervalued the business. Since then, other suitors have thrown their hats into the ring. Coming up for a year ago there was Australian Bank, Macquarie. It offered 950p a share – a massive hike from the Deutsche bid from just 18 months earlier, but even so the bank was turned away without ceremony. Then there was NASDAQ. It too was turned away, but this suitor was not re-buffed so easily.
Today the second largest stock exchange in the US, and the exchange which is seen by many techs, as its natural home, holds a 25% stake in the LSE. It acquired this stake after its initial bid was turned down, and few doubt the US exchange will be back. But the snag is, for the US company, the last time it splashed out on LSE shares it paid 1243p a share, and that means under regulatory requirements, if it does make a bid, it has to at least equal that price. So it will have to fork out a tidy sum. On the other hand, if the NASDAQ waits until May next year, it’s free to offer any price it likes, and so many are betting that’s what it will do.
And yet, the LSE shares currently trade at 1271p. So the question is this, is the LSE share price overvalued after being pushed up by M and A speculation, or is it a fair price reflecting future earnings?
Yesterday, the company revealed its latest six monthly results. Pre-tax profits from last year shot up, from Â£29.4m a year ago, to Â£76.7 million. So while it’s true the share price has seen extraordinary growth, so too has the bottom line.
Ms Furse was at pains to point out that: “In issuer services we raised more money in London than New York which is a remarkable feat when you consider the size of our economy and equity market.” She also said: “The Exchange continues to produce faster order book volume growth than any other major cash or equity derivatives exchange in the western world…New issues, new products and new technology are combining to facilitate a structural shift in equities trading, significantly improving the quality of the market for our increasingly international customer base and creating more value for shareholders.”
Funnily enough, the number of new issues were actually down on the previous six months, but the average size of IPOs rose.
Then again, a part of the LSE’s success lies with softer regulators. The Sarbanes Oxley regulations, introduced into the US after the Enron collapse, are acting like a strait jacket for companies listed on the US stock exchanges- or so they say, and so the LSE is a little like a safe refuge for companies wishing to escape regulatory excess.
But the LSE, like every stock exchange in the world, does face competition from another quarter: Private Equity. The fact that the LSE has grown so rapidly, and has been used as a base by so many companies wishing to raise money, is made all the more extraordinary when you consider the period has also seen rapid growth in Private Equity as a means of fund raising and as an alternative to flotation.
So what about the future.?
Furse and her board are full of fighting talk. “We are not for sale. These results show we have no need to sell ourselves” she was reported as saying in the Independent.
While, chairman Chris Gibson-Smith said: “Our coveted global brand and our unique strategic position at the heart of the world’s capital market in London make us an exceptionally valuable asset.”
Instead Furse and Gibson-Smith chose to focus on consolidation rather than MA as the way forward. Consolidation could perhaps be in the form of an alliance with the Tokyo Stock Exchange.
The dream lives on. While all around stock exchanges fight to merge, the LSE fights to stay independent. And its ultimate fate? As yet this is uncertain, but one thing is for sure. The LSE’s destiny is of utmost importance to UK plc. It reminds us a little of the arguments for and against the UK joining the euro. We need to sign up, went the pro arguments, otherwise we lose out trading position, yet, our currency stays independent and the UK economy thrives.
But then again, we said before and we will repeat it. A merger with the NASDAQ will bring together the LSE and the dynamic US mentality. It could represent the best of both worlds.
© Investment & Business News 2013