Opinion: LSE saga takes a fascinating twist

In the hardened world of the City it is rare for a single PR coup to change expectations, but the London Stock Exchange came close to achieving that last weekend when news leaked that it had pursued exploratory merger talks with ICAP - an inter-dealer broker - some months ago.

The exchange is, of course, marshalling its defences against the possibility of a bid any time after 1 October from Nasdaq, the big American exchange that already holds 25 per cent of its equity.

One of the hurdles it has to overcome is the perception that Nasdaq is the only name in town, and if shareholders reject its approach the LSE's shares would most likely fall.

Introducing ICAP as an alternative bidder achieves two things. First, Nasdaq is seen to have competition, so no one should rush to accept its offer. Second, the presence of a rival suitor, however tentative, will put a floor under the LSE shares and make it less likely they will fall far if the Nasdaq bid fails.

But that is just the beginning. Given that the talks took place months ago, why did the news only emerge this week, at a strategically critical time for the LSE, and at a point most calculated to unsettle Nasdaq?

And why did ICAP boss Michael Spencer make a point of saying that the talks were called off because he thought the LSE shares were too high relative to his? Could it be to make it harder for Nasdaq to persuade outsiders to lend it the money needed to press its bid?

Spencer can expect his own shares to rise, because his firm will now be seen as a key player in the evolving saga of exchange consolidation - and that means hedge funds are likely to start buying in. The more Spencer's shares rise relative to those of the LSE, the cheaper the exchange becomes for him. It is therefore possible that in a few months he will be able to offer more than the current share price for the LSE, and far more than Nasdaq could afford.

This may not happen, but the point in PR terms is that the possibility of it happening is apparent to all.

The emergence of ICAP will now influence behaviour and expectations of all the participants in a way that would not have happened last week. Clever stuff indeed.

Anthony Hilton is City commentator on London's Evening Standard

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