Zacks_Analysts' Blog : LSE Mulls to Acquire NASDAQ - Analyst Blog

Yesterday, the Sunday Times reported that NASDAQ OMX Group Inc. (NDAQ) has caught sight of the London Stock Exchange (LSE), which is mulling over acquiring the former, given the flurry of merger and acquisition (M&A) activity in the global stock exchange industry.

Last week, NASDAQ was also reportedly found hunting for a partner to bid against NYSE Euronext Inc. (NYX), which agreed last month to combine with Deutsche Boerse in a $10 billion deal. NASDAQ is also weighing other options of acquisitions. Other speculations included partnering with the CME Group Inc. (CME) or IntercontinentalExchange Inc. (ICE) and make a counter-bid for the NYSE.

However, a counter-bid in the NYSE-Deutsche deal appears to be unlikely since the agreement of the deal includes a $337 million break-up fee, in case the deal is spoilt by a new bidder and tax issues, among others.

While the NYSE-Deutsche Boerse deal has been ground-breaking for most of the exchange operators, NASDAQ, the leading one in the US, is now desperately trying to retain its market value and strength in the industry.

NASDAQ fears that the culmination of NYSE-Deutsche Boerse deal will diminish the former’s size and global footprint.  On the other hand, a similar apprehension appears to be seeping into LSE, which faces same competitive threats from the expansion of Deutsche Boerse, following the proposed merger. Last month, LSE also announced that it is in the process of merging with TMX Group, owner of Toronto Stock Exchange.

The prospective deal’s combined exchanges and clearing houses would generate an annual €4.0 billion ($5.5 billion) in revenue, higher than any other exchange group. Additionally, this would out beat all the exchange operators with the largest derivative business, representing 37% of net revenue against NASDAQ’s 17% of net revenue as reported in 2010.

Over the past few weeks, the stock exchange industry has picked up pace with the changing market needs and consequently become a hub for M&A activities. While the NYSE-Deutsche deal is undergoing rigorous sessions of investigations by regulatory authorities and is expected to take about a year’s time, BATS, one of the most successful American stock exchanges, completed its deal to buy Chi-X Europe to bolster its European presence last month. In October 2010, the Singapore Exchange had agreed to buy Australia's ASX.

Meanwhile, CBOE Holdings Inc. (CBOE), which runs the Chicago Board Options Exchange, and significant international market operators, like the BM&F Bovespa in Brazil, is also exploring potential M&A options. Even CME is weighing options around the corner on similar grounds.

However, we believe that uncertainty prevails over most of the exchange operator’s future course of action. The sudden business restructuring in the stock exchange industry reflects the rapid need to respond to the changing dynamics of modern finance. These are primarily driven by the increased demand for international services and intense competition, which have led the traditional exchange companies to seek ways to attain scale and services.

Nevertheless, NASDAQ will also have to comply with these changing requirements and the act of mulling over options before its too late, is appreciable and crucial for the company. It is believed that a watchful wait for some more quarters could help NASDAQ with a better choice of growth strategy.