Nasdaq shares fall 5 pc as LSE battles bid

NEW YORK, Dec 19 (Reuters) Shares of Nasdaq Stock Market Inc fell 5.2 per cent on Tuesday to their lowest levels in over a month after the London Stock Exchange urged shareholders to reject a 2.7 billion pound ($5.27 billion) hostile bid from the largest US electronic stock market.

The London exchange, which issued a bullish profit forecast and pledged a dividend hike earlier Tuesday, said Nasdaq's second offer this year substantially undervalued the company in relation to its peers.

Shares of Nasdaq were down $1.88 at $34.11 in afternoon trading.

LSE stock closed down Tuesday 0.53 percent at 1,308 pence.

''This drop is absolutely in reaction to LSE's rejection,'' Piper Jaffray analyst Joshua Elving said. ''I'm a little surprised Nasdaq is down this much, but there is a lot of fast money in exchanges.'' With NYSE Group Inc., owner of the New York Stock Exchange, receiving merger approval from shareholders of Paris-based Euronext earlier on Tuesday, investors may be viewing Nasdaq's apparent inability to negotiate with the London exchange as a concern, he added.

The LSE said its strong performance justified its rejection of the 1,243 pence-a-share offer from Nasdaq, which already owns 28.75 percent of the London exchange.

''For the second time this year Nasdaq is offering a wholly inadequate price for the company, and shareholders should reject the offer,'' Chris Gibson-Smith, the LSE chairman, said in the exchange's initial bid defense document.

Nasdaq said that nothing the LSE said has changed its view on value.

''LSE's current share price is not supported by the company's stand-alone prospects and is only sustainable because of Nasdaq's final cash offers,'' the exchange said in a statement, adding that LSE used ''inappropriate'' comparables in determining its valuation.

One issue is LSE's use of ratios that look at earnings and share prices in 2006 for exchanges like the NYSE, the Chicago Board of Trade and the New York Mercantile Exchange. Their prices have surged during a year of unprecedented merger activity and initial public offerings, said Keefe, Bruyette & Woods analyst Richard Herr.

''It's a little disingenuous to use that group,'' said Herr.

''A number of those names are currently involved in a deal, and the market has been looking at 2007 or 2008 proforma numbers for some time. The document LSE put out is a little misleading in terms of where the true multiples lie.'' Nasdaq also said the LSE fails to address levels of competition that are expected to increase in 2007, when regulations designed to integrate European markets, known as the Markets in Financial Instruments Directive or MiFID, take effect.

''London is underestimating the competitive threat coming their way from MiFID, which is not clearly reflected in their valuation,'' agreed Herr, adding that new trading platforms could pressure LSE's margins next year.

One such platform, a pan-European equity trading platform that will compete with Europe's stock exchanges, is being developed by a group of investment banks including Citigroup Inc., Credit Suisse Group, and Merrill Lynch & Co.

SHARES ABOVE OFFER With LSE's share price above Nasdaq's offer, some shareholders agreed that it was worth more, said Clara Furse, the exchange's chief executive.

Nasdaq's offer values the exchange at a multiple of 24.7 times its earnings, while the sector average is 37.3, Furse told reporters on a conference call.

''Nasdaq's offer doesn't even come close,'' she said.

But the final outcome could be determined largely by hedge funds that have been buying LSE shares and may feel pressured to take Nasdaq's offer, said Herr, the analyst.

''There is a bit of gamesmanship here,'' said Herr. ''If they don't tender shares, there are a lot of potential outcomes that arise, and many of them may not be favorable to LSE's stock price.

That is what the speculators have to start weighing.'' The LSE is being advised by Merrill and Lehman Brothers.

Greenhill is advising Nasdaq.

The LSE said earlier Tuesday it intends to recommend a fiscal-year 2007 final dividend of not less than 12 pence a share, bringing the total dividend for fiscal 2007 to at least 18 pence.

The exchange also said its 2006 adjusted basic earnings would rise at least 58 percent to at least 50.4 pence this year.

REUTERS PKS RN0023