LSE Lays Out Russell Acquisition Proposal

LSE plans to combine its FTSE index business with Russell Indexes, creating a global index business with more than $9 trillion in assets benchmarked to its indexes.

The exchange also says it will review Russell's investment management business and "determine its fit with the group." Industry experts interviewed by IMD after the LSE confirmed merger talks in May agreed that LSE was likely sell or spin off the investment arm, leaving only the index business (IMD, May 26). Virginie O'Shea, a senior analyst at research firm Aite Group, says the subsidiary doesn't fit with the other assets acquired. "I expect an imminent deal or spin-off, once the deal has got all of the required approvals," she says.

Observers also suggest that LSE─already a provider of third-party exchange matching and data distribution platforms via its MillenniumIT subsidiary─will migrate Russell's RussellTick index data delivery platform, which is run by the New York Stock Exchange using a technology platform originally developed by former distribution partner Nasdaq OMX, to proprietary LSE technology.

"[There is] no question that LSE will migrate [RussellTick's] technology to another solution, hopefully internal, otherwise from a neutral vendor," says Joséphine de Chazournes, senior analyst at research firm Celent, noting that one of LSE's first moves after its Borsa Italiana subsidiary acquired a 70 percent stake in European bond multilateral trading facility EuroTLX was to migrate the MTF from its legacy matching technology based on Nasdaq OMX's Click XT system to the LSE's Millennium platform.

However, any technology consolidation may not take place immediately. "I don't expect an immediate rip-and-replace of arrangements in place, as that would be disruptive to business," says Aite's O'Shea, adding that it is common for exchanges to lease other marketplaces' technology platforms. "So I don't anticipate the market would frown on those kinds of arrangements, regardless," she says.

Under the deal, Len Brennan, Russell's president and chief executive, will join the LSE's executive committee.

LSE CEO Xavier Rolet called the combination of FTSE and Russell Indexes represents a "strong strategic fit" that would position the exchange to tackle the changing dynamics in the global indexes market, while Brennan echoed this, citing the companies' "highly complementary fit of products and distribution capabilities."

LSE officials say the deal will increase full-year earnings in the first year, and that $1.6 billion of the acquisition will be financed from the net proceeds of rights issue, with the remaining $1.1 billion funded through debt. The rights issue is expected to be launched in September, after the approval of the acquisition by shareholders.