Nasdaq Ends London Vacation

Inside Value recommendation Nasdaq (Nasdaq: NDAQ  ) recently decided that it had too many irons in the fire, deciding to take one out and concentrate on another. Nasdaq ended its frustrating attempt to acquire the London Stock Exchange, focusing instead on its bid for Nordic exchange OMX, which was recently trumped by holding company Borse Dubai. For Nasdaq stockholders, I'd view the news as both good and bad.

The stage
First, a quick primer. Securities exchanges have engaged in an arms race to bulk up and consolidate, thanks to the synergies created when two networks merge. Rule Breakers pick NYSE  (NYSE: NYX  ) bought Archipelago and Euronext, Nasdaq bought Instinet, and the CME (NYSE: CME  ) beat out the InterContinental Exchange (NYSE: ICE  ) to buy the CBOT. It's become a jumbled-up alphabet soup of merger activity.

The good
Nasdaq's financial results will immediately benefit from its liquidation of the LSE stake, and the company estimates a $0.30-$0.35 EPS boost in 2008. As of the latest quarterly report, Nasdaq owned about $1.56 billion worth of LSE's stock, which the company financed through debt.

Thus, Nasdaq paid almost $100 million in interest expenses, but it couldn't book "income" to represent its stake in the LSE, which understated Nasdaq's true earnings power. The company could use about $1 billion of proceeds to retire debt and buy back shares, which should help more accurately demonstrate Nasdaq's true earnings power.

The bad
On the other hand, competitive auctions make me nervous. The Borse Dubai trumped Nasdaq's bid for the OMX by about $300 million. Although I haven't done the research to know what a reasonable price tag for the OMX would be, if Nasdaq counters with a higher bid, I'd worry that the company may be overpaying. I understand that exchange mergers, unlike most mergers, actually result in substantial synergies, thanks to overhead reductions and cross-selling opportunities. However, the higher the OMX price tag gets, the more value flows to OMX shareholders, and away from either Nasdaq or Borse Dubai's owners.

I'll have to wait for it all to shake out before deciding whether to enter the fray. My version of the ideal scenario involves Nasdaq walking away from the OMX and using its substantial excess capital to buy back its own shares. Hopefully, at that point, Nasdaq will still be trading in the low $30s.

Related Foolishness:

Nasdaq is anInside Value pick. NYSE is a Rule Breakers recommendation. Try any one of our investing services free for 30 days.

Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 534552, ~/Articles/ArticleHandler.aspx, 10/21/2014 1:41:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement