September 27, 2007 / 11:54 AM / in 10 years

More Middle East money in exchanges likely

By Anupreeta Das - Analysis

<p>An investor looks down towards the trading floor of the Dubai Financial Market during operating hours in the Dubai World Trade Center in Dubai, August 9, 2007. Borse Dubai's recent deal to buy a 20 percent stake in Nasdaq Stock Market Inc may be just the beginning of an infusion of petrodollars into the fast-consolidating exchanges sector. REUTERS/Jumana El Heloueh</p>

NEW YORK (Reuters) - Borse Dubai’s recent deal to buy a 20 percent stake in Nasdaq Stock Market Inc (NDAQ.O) may be just the beginning of an infusion of petrodollars into the fast-consolidating exchanges sector.

But although they may open their wallets, an actual exchange takeover by Middle Eastern investors looks unlikely, analysts said.

Oil-rich Middle Eastern countries have been snapping up stakes in or acquiring various U.S. and European companies, including private equity firm Carlyle Group CYL.UL and U.S. luxury retailer Barneys New York.

Exchanges, which are in the midst of a wave of global mergers, seem have become their latest focus.

But Middle Eastern countries such as Dubai and Qatar, which both bought stakes in the London Stock Exchange Group Plc (LSE.L), probably will not become anything more than minority stakeholders.

They want influence in global financial markets by buying strategic stakes in exchanges, but may not want to take them over.

“It’s about getting a seat at the table to influence future events,” said David Easthope, an analyst for Celent, a financial consultancy. “To that extent, they are no different from a strategic buyer, a hedge fund or a private equity firm.”

The state-owned Qatar Investment Authority has said its recent purchase of a 20 percent stake in the LSE is “strategic” and it has no plans to launch a takeover bid. It also bought nearly 10 percent of Nordic markets operator OMX AB OMX.ST, which Nasdaq and Dubai agreed last week to acquire jointly.

INFLUENCE AT STAKE

Seeking ownership of an exchange may raise domestic political hackles. Last week’s news that Dubai would gain one fifth of Nasdaq, the largest U.S. electronic equities market, has already raised concerns about control by foreign governments.

U.S. President George W. Bush said last week that a careful review of the Nasdaq deal is required to assess national security implications.

NYSE Euronext NYX.N Chief Executive John Thain said Dubai’s Nasdaq stake and two board seats gives them “significant” influence and a question mark hangs over whether such a structure is acceptable to legislators.

“I think there will be issues raised and concerns about any government owning or controlling a U.S. exchange,” Thain told Reuters.

But U.S. exchanges may need alliances with Middle Eastern investors as they seek to expand into new markets.

Larry Tabb, chief executive of financial consultancy Tabb Group, said small and medium-size markets such as Nasdaq would be more welcoming of Middle East money than a large exchange such NYSE Euronext.

“One of the challenges for Nasdaq is cash,” Tabb said.

Nasdaq’s market capitalization of $4.2 billion is dwarfed by NYSE Euronext’s $21 billion.

“New York is on much better ground because they have a significant war chest,” Tabb said.

Nasdaq’s deal with Dubai and OMX will create a group of exchanges linking the United States, Europe and the Middle East. It will also provide Nasdaq and OMX a launching pad for licensing technology to exchanges in emerging markets.

NYSE Euronext’s Thain sees “four or five large multi-product global exchange groups” in a few years and the Middle East will become an important participant.

NYSE Euronext is interested in getting involved in the region, he added.

Regional U.S. exchanges may also be targets of Middle East money, analysts said.

Meyer Frucher, chief executive of the Philadelphia Stock Exchange, which is known to be looking for a buyer, said he welcomed the entry of Middle East players.

“We would be interested in talking to anybody who will enhance value for our shareholders,” he added.

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