Should Nasdaq's Deal with Borse Dubai be blocked by US Legislators?

Implications: The FT article makes clear that those US legislators who blocked the attempt by Dubai to take over certain US Prt facilities may now be aiming to block the sale by Nasdaq of 20% of its equity to Borse Dubai. This is a serious potential protectionist move which must pose questions about the openness of US financial markets.

Analysis: Last Thursday’s news that Nasdaq has reached agreement with Borse Dubai over the future of OMX comes as a welcome surprise to just about all the interested parties in this saga. Shareholders in OMX get to sell their shares at the price being offered by Borse Dubai. Nasdaq gets to buy OMX from Borse Dubai. Borse Dubai gets to buy most of Nasdaq’s shareholding in the London Stock Exchange (currently around 30% but due to drop to around 22% once the LSE’s deal with the Borsa Italiana is finalised) and Nasdaq gets a foot in the door in Dubai. Both Nasdaq and Dubai get to avoid a costly bidding war for OMX and Dubai gets to avoid having to persuade sceptical shareholders of their credentials for running a sophisticated operation like OMX.

Does everyone win? Is this one of those deals that has no losers? That was the question I was asked by CNBC on Thursday morning. In the very limited time one gets to think of an answer in a TV interview the conclusion I reached was that there was no real loser (with the possible exception of those shareholders hoping for a protracted bidding war). But there were two entities which would now need to look very carefully at the long term ambitions of Dubai, and those are the London Stock Exchange and the Qatar Investment Authority (QIA). It is pretty clear that Clara Furse, the LSE’s chief executive, would have liked very much for Nasdaq’s shareholding to be split up between a number of different shareholders. She made it clear when a group of Italian bankers looked like they were going to buy a substantial slice of the Nasdaq shareholding that she would regard that as an unfriendly move. So they dropped out, not wishing to antagonise the new owners of the Borsa Italiana.

The QIA was also a potential bidder for the Nasdaq stake. The fact that at the last minute Nasdaq has instead sold its stake to the QIA’s biggest competitor, Dubai, will no doubt have infuriated Qatar. That would explain why Qatar took two very aggressive steps yesterday afternoon. Firstly they purchased the LSE stakes of two hedge funds (amounting to 20% of the LSE) and secondly they purchased 10% of the equity of OMX and advised OMX shareholders to do nothing in response to the Borse Dubai/Nasdaq offer, implying that the QIA itself might bid for OMX.

This leaves the LSE in the bizarre position of having just under 50% of its shares in the hands of two Gulf Emirates, Dubai and Qatar. Does Clara Furse now have to spend her quieter moments worrying about a full scale bid for the LSE from a joint Dubai/Qatar team? Given the fierce rivalry between Dubai and Qatar this is obviously not an immediate threat. But is a bid from one or other of the Gulf Emirates a longer term threat? It has been rumoured for some time that during the Nasdaq bid to take over the LSE there were talks between the LSE and the Dubai International Financial Centre about the latter taking a friendly stake in the LSE to help it fend off Nasdaq’s unwelcome (from Clara’s point of view) bid for the LSE. The talks apparently came to nothing and the LSE was robust enough in its defence of its independence not to need the help of Dubai. So, on the one hand, Dubai and the LSE look as if they can operate as friends. On the other hand the LSE is now lumbered with two very large minority shareholders whose intentions are, to say the least, unclear. The LSE issued a statement yesterday saying that they “welcomed” the investment by the QIA, but I suspect that was made through gritted teeth.

What exactly is Dubai up to? Ever since it built its international financial centre (the DIFC) it has been clear that Dubai has financial ambitions that go beyond the Gulf. As early as 2004 it was known that Dubai was running its slide rule over potential purchases in the financial field, when those doing the numbers were more than a little surprised to discover that in market capitalisation terms the world’s biggest and best known exchanges were not that expensive. But what has held them back until now from taking an aggressive approach to acquisitions in this area has been the controversy that erupted in the US over Dubai’s purchase of the P&O assets that included some of the major US port facilities. The protectionist and some would say racial tone struck by some US legislators (including some of the current contenders for the presidency) came as a shock to Dubai and clearly convinced its ruler that maybe the USA was not quite the home of the free market that it claims to be.

Hence Dubai has been very careful in its use of its considerable financial clout and has tried hard to ensure that its ambitions are exercised in a way in which it is unlikely to stimulate the sort of response that it encountered in the US. In this endeavour it has to be said that it has been largely successful. In the Nasdaq/OMX deal it has negotiated skilfully and discreetly. And it has come out of the deal with its head held high having secured some very interesting options for itself. By taking a shareholding of some 20% in Nasdaq, but having voting rights capped at 5% one assumes that it has taken the protectionist mood in Congress into account. And yet the immediate response from some US legislators has been disappointing – Senator Charles Schumer, the chairman of Congress’s joint economic committee (and the prime mover behind the campaign to block Dubai from taking over some US ports facilities) has been quoted as asking whether foreign governments should be allowed to “take over our financial exchanges…” President Bush has said that the proposed investment in Nasdaq by Borse Dubai would face a national security review. And this week, as today’s FT article makes clear, Hank Paulson has to make some rather tricky decisions. This knee-jerk response to a voting stake of no more than 5% seems more than a little excessive. Is it a disturbing sign of yet more protectionist behaviour by US legislators in the months and years ahead?

The very complex deal put together by Nasdaq, OMX and Borse Dubai looks very sensible from a global exchange consolidation perspective. If US legislators really do try to block it, this will only emphasise once more the extent to which they are withdrawing from the global free market which has done so much over the years to benefit the US. And what a pity that would be for both the US and those major financial centres which benefit from its innovation and dynamism.