Should London Stock Exchange shareholders get out now?

With the New York Stock Exchange whisking European rival Euronext off its feet, is London Stock Exchange in danger of being left on the shelf?

Is London Stock Exchange in danger of being left on the shelf?

In the past year, the LSE has rejected bids from both Australia's Macquarie Bank, and the US Nasdaq exchange.

But with the New York Stock Exchange now whisking European rival Euronext off its feet, has the LSE been too picky for its own good?

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New York Stock Exchange (NYSE) has struck a deal to merge with Euronext for $9.9bn.

Euronext is Europe's second-largest stock exchange operator, behind London Stock Exchange (LSE). It runs stock markets in Paris, Amsterdam, Brussels and Lisbon.

If the NYSE bid succeeds, the combined exchanges will have a market value of about $20bn. NYSE Euronext will handle more than $2 trillion stock trades every month.

In this "merger of equals", as it is being billed, the US headquarters will be in New York and the international HQs in Paris and Amsterdam, while the derivatives unit, Liffe, remains in London.

Frankfurt-based rival Deutsche Boerse is still trying to tempt shareholders away with an alternative merger offer, but the German group will have a very tough fight on its hands.

Though some commentators feel that NYSE is underpaying - the term "merger of equals" is often takeover-speak for "we're not offering much for this company and we know it" - the NYSE bid has secured the support of hedge fund Atticus Capital. The group holds a large chunk of both Euronext and NYSE, and had previously been hostile to the bid. Deutsche Boerse's merger proposal is also thought to require that the company takes on more debt.

But more importantly, the idea of a transatlantic stock market operator is frankly a lot sexier than just an expanding European one. The latest reports suggest that NYSE and Euronext are already looking to persuade the Italian stock exchange, Borsa Italiana, to join them too.

And the truth is that a transatlantic exchange provides Europe - and Paris specifically - with a much more realistic chance of creating a real financial centre to rival London.

That probably explains why the French are so far giving this deal such an easy ride. When US group Pepsi was rumoured to be interested in French food group Danone, the country was up in arms at the potential loss of its yoghurt, and Pepsi rapidly beat a retreat.

But dangle the prospect of trouncing London as Europe's premier financial centre in front of them, and suddenly teaming up with the Americans doesn't sound so bad.

So could this merger threaten London's pre-eminence as a financial centre? One aim of NYSE Euronext would be to attract some of the companies which have been put off listing in the States by the expense of complying with the post-Enron Sarbanes-Oxley legislation.

That's driven a lot of firms to float in London, which has seen an influx of Initial Public Offerings (IPOs) from the likes of Russia, China and India. The prospect of listing on an exchange with firm US links, but without the costly legislation, may well appeal more to these firms.

But for every cloud there's a silver lining. Euronext owns the Liffe derivatives trading platform, but it's based in the City - and will remain so. As London newspaper, the Evening Standard points out, that means "London is poised to be a major beneficiary" of the deal. NYSE Euronext would like Liffe to overtake the Chicago Mercantile Exchange to become the world's largest derivatives market - and that could mean plenty of extra products, commission and work for all the City boys and girls.

But what's good for the City is not necessarily so good for London Stock Exchange. Sure, plenty of mergers fall flat on their faces, and that may well happen here - there are still plenty of regulatory hurdles to be jumped. But there's no denying that a successful deal between NYSE and Euronext would present a serious challenge to the group.

And there's now little hope of a bidding war erupting over LSE. NYSE's main rival, Nasdaq, owns more than 25% of LSE. Under Takeover Panel rules, it cannot bid for the group until September. But 25% is more than enough of a stake to scupper any other attempted deals.

There's also the little matter of the recent turmoil in global stock markets. If the ups and downs continue, the environment for IPOs (IPOs) will look a lot less attractive. With less business to go around, both LSE and its potential new rival will suffer.

At the current share price of £11.40p, investors who got in a year ago are looking at gains of 137%. As the saying goes, no one got poor by taking their profits too early - we'd suggest investors lock in their gains now.

Turning to the stock markets...

The FTSE 100 ended higher, gaining 14 points to close at 5,764. BAA was the main riser, up 3% to 905p on reports that Citigroup was looking to buy 150m shares at 900p each for Spain's Grupo Ferrovial. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 gained 12 points to 4,959, while the German Dax fell 20 to close at 5,687.

Stock markets were mixed across the Atlantic. Jobs growth in May was weaker-than-expected. Payrolls grew by 75,000, less than half the 174,000 predicted by experts. It means the Fed may think twice about raising rates again - but it also means the economy may be weakening. The Dow Jones Industrial Average fell 12 points to 11,247, but the S&P 500 gained 2 to 1,288. Meanwhile, the tech-heavy Nasdaq was barely changed at 2,219.

In Asian trading hours, the Nikkei 225 fell 121 points to 15,668 as crude oil prices moved higher. Exporters were among the main fallers again as the dollar fell against the yen.

This morning, oil headed sharply higher in New York, trading at around $73.50 a barrel. Brent crude was also higher, trading at around $69.90.

Meanwhile, spot gold was also rising, trading at around $642 an ounce, while silver traded at around $12.26.

And here in the UK, Commonwealth Bank of Australia has said that it has joined the Goldman Sachs-led consortium that may be planning to make a counterbid for UK airports operator BAA.

And our two recommended articles for today...

How to predict when the dollar will fall

- Very few people truly believe that the dollar will collapse. But the truth is that currencies - even of strong countries - fall apart regularly. Look at sterling in 1931, or the German Reich mark, says The Daily Reckoning's Dan Denning. The dollar's collapse is a question of when, not if - and Dan believes he has found the perfect way to time the plunge. To find out what it is, see: How to predict when the dollar will fall

Could coal replace oil?

- Peak Oil is hitting headlines across the globe. But could coal replace oil as the world's source of liquid fuel? Martin Spring points out in the On Target newsletter that a well-established technology, economic at current oil prices, could allow the US to increase its equivalent oil reserves by more than 20 times by exploiting its coal reserves. To find out how it can be done, and which companies could benefit, click here: Could coal replace oil?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.