THE London Stock Exchange and Icap, the world’s biggest inter-dealer broker, have held detailed talks about merging to create one of the most powerful trading platforms in the world.

The talks, held over several weeks during the summer, aimed to create the “all-British solution” to the long-running battle for consolidation among the world’s stock exchanges.

However, Michael Spencer, chief executive of Icap and the City’s richest man, worth more than £600m, has in recent weeks temporarily halted discussions because he believes the LSE is too highly valued and a deal at current prices would be too dilutive to his investors.

Spencer, who is also a well-known Tory donor, and Clara Furse, the LSE’s Canadian-born chief executive, are understood to have a shared view that there would be compelling commercial synergies in merging the LSE and Icap in a friendly, agreed takeover.

A merger between the two would create a £5.9 billion group bringing together the LSE — the most international equity market in the world — with Icap, which dominates electronic derivatives, fixed income, energy and other money-market broking. It would also bring the LSE a platform to build a derivatives market, which it has been seeking ever since it lost the battle for Liffe to Euronext.

Icap, which is valued at £3.3 billion, joined the FTSE 100 at the last reshuffle just a few weeks ago, while the LSE is worth £2.6 billion.

The revelation of the detailed talks comes at a sensitive time for Furse.

On October 2, Nasdaq, New York’s tech-heavy exchange, will be free to bid for the rest of the LSE after its acquisition of a 25% stake six months ago.

But since Nasdaq is still bound to pay £12.43 per share — the level at which it paid for the holdings it bought from Threadneedle Asset Management and Scottish Widows — it was widely expected to wait a further six months for this rule to lapse. If Icap can launch a bid, things may change.

A potential merger with Icap is one of many strategies being looked at by the LSE, which hopes to thwart Nasdaq.

Other options being considered by the LSE’s advisers at Merrill Lynch include doing deals with private-equity partners, while talks with exchanges in the Far East and the Swedish OM exchange, are still thought to be taking place.

Icap has enjoyed astonishing growth in the past decade. Spencer, head of the Conservative party’s City Circle, has grown the small interest-rate swaps broker into an inter-dealer money broker that handles $1,000 billion (£526m) in derivatives, Treasury bonds and other over-the-counter products every day.

Spencer has grown the company by mopping up competitors and moved the voice-based business to electronic trading with the purchase of Brokertec in the US and EBS, the foreign-exchange trading platform.

Pre-tax profits in the year to March hit a record £193m while profits next year are forecast to be about £260m. Icap makes its money by charging commission on the brokerage it handles for its commercial and investment-banking clients.

Spencer and his family own 20.48% through Intercapital. He also controls City Index, the spread-betting house, as well as stakes in Numis, the stockbroker, and the restaurant group that includes The Avenue in St James’s.

Sources close to the situation said: “Icap could be a great white knight for the LSE. This is pure M&A and a superb way of consolidating London’s position in the financial markets.

“The LSE is doing extremely well at the moment, volumes are high and Sets trading is doing extremely well. For Icap it could be a sound, long-term investment as more and more of its business moves to the exchange and becomes regulated.”

Another source said: “This could be a brilliant deal for Icap but at the moment the LSE price is too high.”

The other sticking point was the lack of synergies and the low level of costs that could be taken out.

Furse has come under criticism from investors for failing to demonstrate a strategy for the LSE to remain independent. It has been at the centre of bid battles from rival exchanges for the past 20 months. Each time the offers have been rejected.

However, the takeover speculation has helped push the LSE’s share price ever higher. Since December 2004, when Deutsche Börse announced its ill-fated intention to bid for the LSE, the exchange’s share price has risen from 500p to as high as £12.85. The rise has been fuelled by interest from Euronext, the New York Stock Exchange and other smaller European exchanges including Sweden’s OM.

Bid speculation came to a head after Nasdaq built a commanding position in the LSE’s shares. The City is now waiting for Nasdaq to renew its overtures, but LSE investors are expected to be keen to hear more details of Icap’s approach. While talks have broken down, they could easily be reignited.

LSE AND ICAP AT A GLANCE

LSE
Market capitalisation: £2.6 billion
Sales: £297m
Sales growth: 21.7%
Employees: 501
Profits (pre-tax): £93.5m

Icap
Market capitalisation: £3.3 billion
Sales: £919m
Sales growth: 13.1%
Employees: 3,146
Profits (pre-tax): £193m

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