Nasdaq-LSE: Is the Party Over?

Does the apparent death of the Nasdaq/LSE deal spell doom for the transatlantic duo? Are Nasdaq and the London Stock Exchange shark bait, or is this one more step in a chess match being staged on a global scale?

Nasdaq seems to be at the short end of this stick. With a significant debt and no partner, Nasdaq either will need to quickly acquire a partner or sell its LSE stake, pay off the debt and get its balance sheet back in order.

So who should Nasdaq buy? The most obvious choices are the Deutsche Börse and OMX. As the Deutsche Börse is larger, it would seem to be the prime target. However, the Deutsche Börse generates the bulk of its revenue from Eurex (the derivatives exchange) and Clearstream, a depository that the European Union would like to see divested. These entities account for almost 70 percent of the Deutsche Börse's 2005 revenues while equity trading accounted for only 15 percent. Divesting Clearstream makes a potential transaction for Nasdaq uncertain as 35 percent of the Deutsche Börse's revenue may be out the door before the transaction closes. And while OMX may be an interesting acquisition, it does not have the LSE's or Deutsche Börse's scale.

The Tokyo Stock Exchange may be a thought. But while the New York, Singapore, Korea and London exchanges all have developed partnerships with the TSE, the TSE still is a member-owned organization, as is the Korea Stock Exchange, which makes both of these acquisitions difficult.

The Hong Kong Stock Exchange certainly would be an interesting option. Hong Kong is in the center of the emerging Chinese economy, and the exchange is public and more Western than either the Japan or Korea exchanges. However, a merger or acquisition of the Hong Kong Exchange may be problematic because, well ... China is ... China.

There also are Toronto, Montreal, Australia and other smaller exchanges. However, acquiring these would need to be part of a roll-up strategy, as none of the destinations alone would provide the scale of the LSE.

An out-of-the-ordinary play would be for Nasdaq to merge with ICAP, the interdealer broker (IDB). While ICAP is a broker, it does not market-make or take proprietary positions. ICAP also owns two major electronic brokers -- BrokerTec (U.S. sovereign debt) and EBS (FX). Further, ICAP is one of the largest derivatives IDBs, which is an extremely lucrative business.

Another Nasdaq play may be providing the infrastructure for Project Turquoise, a broker-dealer consortium starting up a multilateral trading facility -- a European ECN. While this would not be realistic if Nasdaq's run at the LSE was successful, it now may be an opportunity. But the impact of this would not be immediate, and it would not bring the scale promised by the LSE transaction.

The LSE, however, is in a better position than Nasdaq, as being London-based and in the midst of the new hot zone could make a smaller play work. LSE would have an easier time making an OMX transaction work or possibly a deal for the Swiss Exchange (SWX), but SWX is not public. MiFID also plays in LSE's favor, as the regulation will allow the LSE to compete on a more level playing field for business across Europe.

For geographic diversity's sake, a smaller U.S.-based acquisition may make sense for the LSE. The AMEX may fit nicely into this scenario. While the AMEX is filing to go public, it appears it has missed the window, as the NYSE share price is off its peak significantly and the success of the other regional exchanges looks questionable. But while it may have missed the exchange feeding frenzy, the AMEX certainly is worth something as it has a registration, is grandfathered under NMS, has prime real estate (once the Freedom Tower is built) and does have a listing business.

The interesting play here would be for the LSE to buy the AMEX, shut it down, sell the real estate, keep the registration and leverage the LSE's technology to extend AIM (London's lesser capitalization market) and the Main Market to the U.S. This would be the reverse listings play that Nasdaq would have pursued with the acquisition of the LSE. Interesting, eh?

While the permutations and combinations of entities for Nasdaq and the LSE have outstripped the length of this column, the pressure to expand, unfortunately, is unconstrained. While this deal may have been flawed, the paring soiree continues as the industry's global push seems unflappable.

Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]