New TMX bid may make LSE a takeover target

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The hunter may soon become the hunted.

That apparently is the conclusion of London Stock Exchange shareholders, who drove up the LSE share price 7.5 per cent on Monday. They did so after a competing bid came in for TMX Group Inc. one that may deprive the LSE of its Canadian prize and make it vulnerable to a takeover as global exchange consolidation picks up momentum.

If the all-Canadian Maple consortium wins TMX, owner of the Toronto and Montreal exchanges and the TSX Venture Exchange, the centrepiece of Xavier Rolet's growth strategy will have vanished. Mr. Rolet, the Frenchman who became CEO of the LSE two years ago, feared the exchange would become a runt in a land of giants and launched a bid for the TMX in February.

The previous LSE boss, Clara Furse, had resisted no fewer than three takeover attempts – one from Australia's Macquarie Bank Ltd., the other two from Nasdaq (now Nasdaq OMX Group Inc.) and Deutsche Boerse AG. Her main international foray was the purchase of Borsa Italiana, owner of the fairly small, flat-growth Italian stock exchange.

While the LSE on Monday restated its commitment to the TMX deal, there were doubts that Mr. Rolet would engage in a potentially costly bidding war with Maple.

"It's a humiliation for him," said Tim Stocks, the leader of the financial institutions practice at London law firm Taylor Wessing. "This risks leaving London as a relatively minor player on the world stage, creating a disconnect between London as a global financial centre and the size of the LSE itself. The LSE would become vulnerable to an opportunistic bid."

Who might launch such a bid? Nasdaq, the LSE's old suitor, might be one candidate.

The chance of Nasdaq renewing its interest for the LSE rose on Monday, after it and IntercontinentalExchange Inc. withdrew their joint, $11-billion (U.S.) bid for NYSE Euronext Inc. because U.S. antitrust officials threatened to block the deal. Their retreat means Deutsche Boerse moves one step closer to merging with NYSE while leaving Nasdaq without a partner.

Will Rhode, an analyst in London for TABB Group, a Massachusetts financial services consultancy and research firm, conceded it's possible that Nasdaq would take another lunge at the LSE but said doing so might appear more "reactive than visionary." The Singapore Exchange, he said, might make a better fit for Nasdaq, in part because Singapore is adopting Nasdaq's ultra-fast Genium Inet trading platform.

Mr. Rhodes does not necessarily think the LSE will be doomed to takeover victim status if it loses TMX; he does not even rule out the LSE going after Nasdaq itself. He notes that the bourse consolidation game still has a long way to run and anything could happen. "There is no shortage of exchanges out there," he said.

The LSE and other exchanges looking for merger partners would seek international exposure, product diversity and technological synergies. Mr. Rhodes thinks the Johannesburg Stock Exchange is one bourse that meets the three criteria and might appeal to the LSE.

The JSE is Africa's largest exchange, wants to expand in southern Africa and is anchored by mining listings, which the LSE would find attractive. It went after TMX in good part because it wanted to create the premier bourse for resources companies, big and small.

Advisers to the LSE would not comment about the LSE's next potential move. The LSE itself would only say that its LSE-TMX merger proposal "offers compelling financial, strategic and operational benefits for shareholders, the full breadth of market participants, listed companies of all sizes, investors and other stakeholders."

A senior exchange executive who did not want to be identified did not rule out the LSE improving its bid for TMX, but said there is only so far the LSE would be willing to go. If the LSE bumps up its offer substantially, the deal would risk diluting shareholders. And if it were to inject cash to make it more appealing to TMX shareholders, the extra debt might damage its financial health. "Does Xavier Rolet want to mess up his balance sheet to buy the TMX? I don't think so," he said.