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After rejecting jazz-loving German aggressors, debt-demented Australians, hesitant French federalists and over-extended Americans, it seems only natural that the London Stock Exchange should have had discussions with a home-grown City legend. ICAP, the inter-dealer broker and recent arrival in the FTSE 100 index, is a more logical partner than might first appear. It effectively acts as an exchange in over-the-counter traded assets such as treasuries, currencies, corporate bonds and credit derivatives, with a blended global market share of around one-third. If the future of exchanges is funnelling a wide range of financial products through the same customer infrastructure, an LSE/ICAP combination might look rather visionary. Supporters of the combination also think that over time, cost synergies – consolidating IT systems – would at least rival those of transatlantic combinations.
Unfortunately there are two sets of problems. First, ICAP’s chief executive and 20 per cent shareholder, Michael Spencer, thinks that the LSE, trading on 26 times March 2007 earnings compared to ICAP’s multiple of 21, is too expensive. ICAP has a net cash position but may be restricted from paying cash by regulatory capital requirements. Its £3.3bn market capitalisation is bigger than the LSE’s £3bn, and the LSE’s culture has moved on from its mutually owned days. But in the case of an all share deal it is still not clear that Mr Spencer could stomach a loss of control.
The second problem is Nasdaq, with its 25.4 per cent stake in the LSE. This is not enough to block an ICAP deal if it were structured as a reverse takeover by the LSE, but the LSE would still have to win over the “event driven” hedge funds who now feature on its register and are keen for a quick exit. Nasdaq is free to bid again from October 2 at a price of at least £12.43 per share. Financially, it is a pretty feeble aggressor, with a £2.7bn market cap, sagging share price, puny earnings and overgeared balance sheet. And newly assertive UK authorities will be nervous about any regulatory creep. But with its heart set on London and two private equity firms purportedly prepared to help it pay for this ambition, a purchase by Nasdaq remains the most likely outcome. Unlike in love, in takeovers the desperate often succeed.