Shares of LSE Suffer a Chill [WSJ]
Missed Chance at Merger, Competition Take Toll; All Eyes on Results
By SIMON KENNEDY
May 21, 2008; Page C2
After a sensational run during 2006 and 2007, London Stock Exchange PLC's stock has cooled off markedly.
[Letter]
Can London's exchange win back investors?
Shares in the exchange, which delivers its annual results on Thursday, have tumbled 45% since the start of the year. While it is hardly the only stock exchange to suffer a downturn, its chief rivals, including NYSE Euronext, Deutsche Börse AG and Nasdaq OMX Group Inc., have seen more modest declines of about 20% to 25%.
One factor weighing on the LSE, analysts say, is that its business model is less diversified than some of its competitors. NYSE Euronext and Deutsche Börse, for example, have strong derivatives operations, while the LSE is much more reliant on traditional stock trading, where competition is growing. Nasdaq OMX, meanwhile, generates significant revenue from its technology arm, selling trading platforms to other exchanges around the world.
On the surface, the United Kingdom exchange's revenue growth appears healthy; average daily trading volume for the 11 months ended in February was up 86% from the same period a year earlier. But April's figures suggest growth could be slowing, with the total value traded during the month up 10% from a year earlier, and analysts say the long-term picture might not be so rosy. Investors are worried that trading volume will shrink if hedge funds and investment banks, reeling from the credit crunch, conduct fewer transactions. Meanwhile, the emergence of alternative trading platforms, including Chi-X, owned by Japanese bank Nomura Holdings Inc., threaten to take away business from established exchanges such as the LSE.
Another cloud hovering over the LSE is the growing sense that its chances of merging with another exchange have faded, following a failed attempt last year by Nasdaq to acquire the U.K. exchange. LSE's share price has now fallen well below Nasdaq's offer then of £12.43 ($24.21), making the exchange potentially more attractive for a buyer, but the uncertainty in the markets means prospective partners might be wary of pursuing a deal.
"For anyone contemplating a merger with the LSE, the situation looks more complicated than it did a year ago," said Andrew Mitchell, an analyst with Fox-Pitt Kelton.
The LSE hasn't entirely eschewed deals with other exchange operators; in the fall, it bought the Borsa Italiana. On Thursday, investors will be looking to see whether the Italian exchange is making a significant contribution to earnings. |
