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Wednesday, August 27, 2008

Dubai To Save European Shrinking Economy

It was supposed to be the battle of the bourses between the US stock market giant Nasdaq and the emerging market pretender Borse Dubai for a $4 billion takeover of the Nordic stock market operator OMX, which operates bourses in Copenhagen, Helsinki, Stockholm, Reykjavik, Riga, Tallinn and Vilnius.

Instead, it turned out to be a marriage of convenience with Nasdaq Stock Market yesterday signing a complex deal with Borse Dubai that underlines US and GCC control of two of the most prestigious stock markets in western Europe.

Liquidity rich Borse Dubai trumped an earlier $3.7 billion recommended offer from Nasdaq for OMX with a $4 billion offer, which was simply difficult to refuse.

Under the deal, Borse Dubai proceeds with its $4 billion takeover of OMX, only to sell all its shares in OMX to Nasdaq. In return, Borse Dubai receives a 20 percent stake in Nasdaq; and acquires Nasdaq’s 28 percent stake in the London Stock Exchange (LSE). Nasdaq has a further option of taking a 33 percent stake in the Dubai International Financial Exchange (DIFX), to be renamed Nasdaq DIFX. The deal allows Dubai to use this name in the Middle East, North Africa and South Asia.

The US bourse is still smarting from the rejection in February 2007 by the shareholders of the UK exchange of its takeover bid for the bourse. Subsequently, Nasdaq announced last month that it would sell some of its 31 percent stake in the London Stock Exchange.

In a seemingly unrelated development yesterday, the Qatar Investment Authority (QIA) confirmed that it had bought a 20 percent stake in the LSE through its wholly owned subsidiary, Qatar Holding. This brings the combined GCC stake in the LSE to 48 percent. QIA confirmed that the investment is a strategic long-term investment and it may put in a takeover bid for the whole of the LSE at a later stage. Both deals will have to be approved by shareholders and regulators in the UK, Europe and the United States.

US President George W. Bush said a national security review will be conducted on the planned investment by Dubai’s state-owned stock exchange in the Nasdaq. “We are going to take a good look at it as to whether it has any national security implications involved in the transaction,” Bush said in response to a question about the deal during a news conference in Washington. “I’m comfortable with the process.”

The last time a Dubai entity bought a major British/European company with strategic infrastructure assets in the US, there was a groundswell of political opposition in the US, bordering on the chauvinistic, to GCC investment in perceived strategic assets such as ports and airports.

The deal in question was the $3.5 billion takeover by Dubai Ports of the UK’s shipping giant, P&O, who also managed several ports in the US. Dubai Ports was forced to divest from the US assets as a condition for the acquisition of P&O. Some Americans did not want Gulf Arabs to manage their ports supposedly because of security concerns.

Will the US regulators see investment in financial services and stock exchanges as a strategic asset? It is unlikely, given Saudi Arabia’s Kingdom Holdings’ stake in Citigroup, for example. However, US Sen. Charles E. Schumer, chairman of the Joint Economic Committee and a senior member of the Senate Banking Committee, has reportedly expressed doubts about the deal, saying it “will raise serious questions that will need to be answered.”

Despite its proposed 20 percent stake in Nasdaq, Borse Dubai’s voting rights in the company will be capped at 5 percent — perhaps to help deflect any concern about a Gulf Arab government owning a sizable chunk of a US exchange. Nasdaq’s president and chief executive, Bob Greifeld, is talking up the deal, telling reporters in Stockholm yesterday that “it’s a good transaction for the US capital markets system and it will make sure that Nasdaq is a key player in the global consolidation. It’s our job to communicate that to legislators and regulators and clearly.”

Bankers in London see this investment in LSE as a strategic investment rather than any attempts to create synergies between the LSE and the stock markets in Dubai and Qatar. Borse Dubai is basically exploring opportunities with capital markets across the globe to leverage technology, liquidity, regulation and expertise, stressed one Dubai banker.

Borse Dubai Chairman Essa Kazim told a press conference yesterday that “our investment in the London Stock Exchange is purely a financial investment. We believe in London as a global financial center, it has great potential to continue to be that way. By entering into a partnership with Nasdaq, we will benefit from Nasdaq’s world-leading brand, technology and platform.”

The LSE yesterday officially welcomed the QIA as a strategic long-term investor, but failed to mention Borse Dubai’s reported acquisition of a 20 percent stake.

Borse Dubai in fact is the holding company for Dubai Financial Market (DFM) and Dubai International Financial Exchange (DIFX).

It was established only a few weeks ago — Aug. 6 — “to consolidate the government of Dubai’s two stock exchanges as well as current investments in other exchanges, expanding Dubai’s position as a global capital market hub.”

The 2015 Dubai Strategic Plan, for instance, defines “financial services and capital markets as a key focus area to support the development and growth of regional capital markets to the highest international standards.”

In fact, the CEO of DIFX is a Swede, Per Larsson, who was the president and chief executive of the OM Group (now OMX) in Sweden from 1996 to 2003.

Larsson led the OM Group through a period of rapid expansion and technological development which culminated in a highly audacious bid for the London Stock Exchange in 2000.

Only a few weeks ago Borse Dubai was reprimanded by the Swedish Securities Council for violating stock market practices when it announced its intentions last month to put in a takeover bid for the Nordic exchange operator OMX.

This is the second agency to reprimand Dubai for the way it has pursued the OMX stake.

The Swedish Financial Supervisory Authority requires any potential owner of the OMX to be “fit and proper.”

The Swedish Securities Council said in a statement that Borse Dubai’s disclosure on Aug. 9 of plans to buy options in OMX had failed to explain that the plans were “directly linked” to an offer to acquire OMX. “Even if the press release is viewed as information of a started book-building process, it’s regarded to have breached good practice on the stock market,” the council said.

“We accept the view of the Securities Council that we ought to have included further information on the option contracts. But based on the circumstances at the time for the release, particularly the fact that no decision had been made whether or not to make an offer, we believe our press releases provided the market with timely, correct and relevant information,” explained Per Larsson at the time.

Borse Dubai has appealed the ruling and it is not clear whether it will have any bearing on the Swedish regulator’s decision to approve or veto the proposed deal with NASDAQ.


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