Nasdaq's LSE stumble makes OMX victory crucial

By Anupreeta Das -Analysis

NEW YORK (Reuters) - Nasdaq Stock Market Inc's (NDAQ.O) plan to unload its London Stock Exchange Plc (LSE.L) stake may put one frustrating bid attempt behind it, but only increases the need to succeed in its next European foray.

And that's far from a sure thing. Nasdaq's $3.7 billion friendly takeover bid for Nordic bourse operator OMX AB OMX.ST faces an aggressive challenge from state-owned exchange operator Borse Dubai, which last week offered to pay a 13 percent premium over the Nasdaq bid for the Swedish prize.

A European acquisition is deemed important for the largest U.S. electronic exchange because technological and regulatory changes are pushing exchanges to merge globally to reap cost benefits and offer trading in various sophisticated products.

"What's at stake for everyone is a market position in Europe as it undergoes dramatic change," said David Easthope, an analyst at financial consultant Celent.

Easthope said the introduction later this year of new EU rules, under the Markets in Financial Instruments Directive, or MiFID, will eventually create a single EU financial services market, and U.S. exchanges should have a foot in the door.

"Either you're going to own an asset and be able to deploy across Europe, or your competitors will," Easthope said.

Nasdaq's arch rival, the New York Stock Exchange, already has a big presence across the Atlantic, having bought exchange operator Euronext to form NYSE Euronext (NYX.N) in April.

GUESSING GAME

Nasdaq's decision to seek a sale of its one-third stake in the LSE, following two unsuccessful bids to acquire the London exchange, dramatized the failure of its previous European strategy, but also removes a cloud of uncertainty.

Fox-Pitt, Kelton analyst Edward Ditmire said in a research note the LSE stake has unfairly weighed on Nasdaq's valuation, partially due to "fears of a prolonged, expensive, distracting and fruitless chase of the LSE by Nasdaq."

FBR analyst Matt Snowling said in a note to clients the LSE stake sale would lighten Nasdaq's debt load and noted Nasdaq expects a sale to boost its stand-alone 2008 earnings per share by 30 cents to 35 cents.

But a LSE stake sale also paves the way for a new guessing game as investors try to figure out how far Nasdaq will go to win its next target.

Because if Dubai emerges victorious in the OMX bidding war, Nasdaq Chief Executive Robert Greifeld could even see his company go from thwarted predator to prey, analysts said.

"We note that companies facing a tougher road often decide that selling out is the best course of action," Deutsche Bank analyst Rob Rutschow wrote in a research note, though he added that a sale of Nasdaq was not likely.

Celent's Easthope said the LSE might even turn the tables and bid for Nasdaq in a year or so. He also identified two options for Nasdaq if its move for OMX fails.

"They can become a secondary player and simply license technology across Europe, or they can buy something small (in Europe) and try to launch off that," he said.

For the moment, Greifeld looks committed to seeing a deal with OMX through. He told investors on Monday the deal has the support of Sweden's business community and OMX shareholders.

Greifeld, who is in Stockholm meeting OMX executives this week, also emphasized Nasdaq has the financial resources and is willing to be flexible about structuring its offer for OMX.

Of course, there is also a chance that he has not entirely abandoned hope of snagging the LSE.

Deutsche Bank's Rutschow said a conspiracy theorist might even suggest Monday's move "potentially puts pressure on LSE's stock price in front of a new bid in early 2008." Under UK rules, Nasdaq can make another bid for LSE next February.

(Additional reporting by Jonathan Keehner in New York)