Macquarie plays for time

Dec 15th 2005
From The Economist Global Agenda

Macquarie Bank, an acquisitive Australian investment firm, has launched a hostile bid for the London Stock Exchange. The offer could yet persuade the exchange’s many other suitors to enter the fray, and the LSE may at last find a partner as the world’s stockmarket operators join forces

WHEN Australia’s national cricket team arrived in Britain this summer, they came with a high reputation and a bravado to match. Yet their talk of easy victory was belied by a failure to follow through. They departed the losers of an albeit closely fought “Ashes” series. The rejoicing that filled the streets of Britain is unlikely to be repeated if Australia’s Macquarie Bank fails in its bid to snatch the London Stock Exchange (LSE)—battles for financial institutions rarely set pulses racing like a crunch sporting fixture, after all. But the hostile bid launched this week by the Australian bank does resemble the performance of its country’s cricketers in one important respect: it is, so far at least, just not good enough.

Macquarie had opened its attack on the LSE on December 8th, after spending several weeks circling the exchange, by voicing an interest in making a cash offer of 580p a share, valuing its target at £1.5 billion ($2.7 billion). The LSE’s disdainful reaction was to bat the offer away, describing it as “derisory”. Most observers had expected the Australian suitor to return with a more substantial bid before a deadline of December 15th set by Britain’s takeover authorities for Macquarie to put up or shut up. In fact, Macquarie merely made formal its previous offer.

Many spectators expressed surprise that the bank had not sweetened a bid which the LSE claimed “fundamentally undervalues the company and lacks any strategic or commercial credibility”. But the cat-and-mouse of corporate takeovers has much in common with the drawn-out subtleties of test-match cricket. By making this bid, Macquarie has won itself another month to reconsider and re-present its offer and a further couple of months to win the backing of half the exchange's shareholders.

Some snooty observers of Macquarie’s initial overtures to the LSE dismissed them as publicity-seeking on the part of a bank keen to raise its profile beyond the shores of Australia. Those aghast that a brash antipodean firm should dare to bid for one of the City of London’s historic and hallowed institutions may not relish the prospect of a genuine bid.

But investors seem generally keen on Macquarie’s approach. The LSE’s shares have risen steadily of late, though they fell back slightly on the morning that Macquarie went hostile. Threadneedle Investments, a big fund manager owned by American Express, raised its stake in the LSE last week, reportedly purchasing nearly 300,000 shares at 615p each—tellingly, substantially higher than Macquarie’s bid; this boosted Threadneedle's total stake to more than 12% and secured its position as the exchange’s largest shareholder. Macquarie will surely have to come back with a better offer if it is to win the LSE, despite its dismissal of the exchange’s current share price as supported by “substantial speculation”. But the intricate dance between the exchange, shareholders and a string of foreign suitors is set to continue.

The LSE has other would-be purchasers. In the past year the exchange has fended off informal advances from two continental European exchange groups, Deutsche Börse and Euronext. Some speculate, more fancifully, that the New York Stock Exchange is interested too. Although neither European exchange has abandoned its interest altogether, both are sidelined for the moment, pondering the British competition authorities’ requirement that they reduce their stakes in clearing and settlement operations before bidding. Some of their shareholders have suggested that, instead of chasing the LSE, Deutsche Börse and Euronext might do better to merge with each other.

Amid all this, the LSE has had a good year. It is still by far Europe's biggest equities marketplace, despite having long ago been overtaken by the two big continental operators in terms of overall turnover. A record 74.5m trades were made in London in the year to November, 23% more than in the previous 12 months. The exchange’s share price hovers around 615p, up by 14% since Deutsche Börse tentatively offered 530p a share a year ago and well above Macquarie’s suggested valuation. This has allowed the exchange to ridicule Macquarie’s opener. “This is really quite bizarre, to say the least,” says one person at the exchange. “We’ve just come out of the worst bear market in a generation. This is not necessarily the time for a cash-out.” Euronext, for one, has hinted at an offer involving shares instead of cash, allowing a greater potential gain for the LSE’s shareholders.

Concerns about Macquarie go beyond price. The bank, which has grown rapidly, with investments in toll roads, airports and property, has no experience of running financial exchanges. Its unusual business model includes a series of listed trusts, which provide the parent company with a stream of fees. Some in Australia have questioned whether its rapid rate of growth can be sustained.

The offer for the LSE, which Macquarie will pursue as part of a consortium, would involve a similar structure. An element of the bid would also be financed through debt, which has caused some to worry that a Macquarie-owned exchange would increase fees. Macquarie has tried to quell the fear that it would charge the LSE’s users more than they pay now.

Whether or not Macquarie wins the LSE, the landscape will keep changing. America’s NASDAQ, which last week bought Instinet, an American electronic market, and was in takeover talks with the LSE several years ago, says it retains a “keen interest” in Europe, where it competes with the LSE for listings. The era of national markets may be passing.

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