Thursday, February 22, 2007

Fear and loathing on the acquisition trail

While the NYSE and Euronext put the final touches to their cross-Atlantic mega-merger, some may be thinking was the London Stock Exchange (LSE) right to slight the Nasdaq's advances.

Well apart from the obvious economies of scale and cost synergies that most mergers entail, it is easy to forget about the cultural and integration challenges that a merger on the scale of the NYSE's and Euronext's involves. Having cleared the regulatory hurdle, it is too soon to say whether they will clear the final hurdle, successfully integrating the two companies.

With that in mind then the LSE's 'go it alone' stance does not seem that brazen given that the London Stock Exchange is a revered institution and a merger with a US exchange would present significant cultural as well as technical challenges.

All is not necessarily lost though for those exchanges that say no to mergers. Acquisition is not the only option for the LSE or the Nasdaq looking to eke some value from its 29.16% minority investment in the LSE.

Bob McDowall, senior analyst, TowerGroup, believes that "interoperability" may be the "route to salvation for Nasdaq and the LSE."

In his latest research note, McDowall writes:

"Adopting a strategy of interoperability is a mutually co-operative, lower-risk approach to consolidation than acquisition, which carries reputational risk if it fails. However, for the LSE interoperability offers it the distinct business and technical benefits as a mechanism for the consolidation of exchanges without losing the independence a takeover removes."

According to McDowall, interoperability would allow the LSE to assess over time the extent to which it wants to work with other exchanges; it would also mean less
uncertainty for shareholders and stakeholders.

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