LSE pays bearable price for misjudging TMX deal

June 29, 2011

By Chris Hughes and Antony Currie
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

LONDON/NEW YORK — The London Stock Exchange has paid a bearable price for misjudging its proposed merger with Canada’s TMX. It was naive to think the C$3.6 billion deal, which collapsed on June 29 amid opposition from TMX’s shareholders, would be plain sailing. The LSE is now damaged and vulnerable. But it doesn’t need a deal and its next transaction — whether as bidder or target — probably won’t happen in a hurry.

TMX was worth a shot. There were modest synergies, and the LSE would have controlled the board without paying a premium. By contrast TMX would have surrendered control for very little value.

TMX investors may well now favour a premium bid from the Maple consortium of 13 Canadian financial institutions. This is riskier, because the plan involves another domestic exchange merger that faces competition issues. But with LSE out of the picture, TMX and Maple can now work with regulators to structure an acceptable combination.

It’s wrong to punish executives for having a go. But LSE boss Xavier Rolet is inevitably weakened by the failure of this transaction. Moreover, a spate of failed exchange deals means there are many restless bidders out there. Nasdaq OMX and Singapore’s SGX look like natural suitors. Nasdaq has twice tried to buy LSE before.

LSE shares already enjoy bid speculation. They’ve climbed 6 percent in a falling market since February. But Rolet has time to rebuild his defences. Nasdaq boss Bob Greifeld cannot afford yet another failed hostile bid — the firm’s stock market rating is already among the lowest in the sector. A successful deal would mean winning over the LSE’s two big Gulf investors, the Qatar Investment Authority and Borse Dubai, although the latter is helpfully the largest investor in Nasdaq. They bought into the LSE at around 15 pounds a share against a close of 941 pence on June 29, so they would take some persuading without a huge premium.

If there’s a broader lesson from the last few frenzied months in the world of exchanges, it’s that deals in the sector are easy to announce but much harder to complete. The LSE won’t give up on mergers, though it may end up as a seller rather than a buyer. But it needn’t panic.

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