Tuesday, September 25, 2007

Sher Value: An elegant end.

Just when we thought we are going to be in for a long fight the tables turned neatly with the announcement that Borse Dubai and Nasdaq had arrived at a settlement where by after the purchase of OMX, Borse Dubai will swap all the stock for a stake in both NASDAQ and the London Stock Exchange. In a sense it clearly shows that the spirit of compromise was there on the side of Dubai and that its interest in OMX was not so much about controlling all the stock but to consider viable investments, irrespective of the size of the shareholding. From Borse Dubai’s perspective that is important is that with this deal they get 20% of NASDAQ shares and 25% of LSE stocks, which are significant shareholdings in the exchanges.

The announcement has barely hit the airwaves when there was noise about the ‘implications’ of this deal on ‘US security’. Some have argued that this is reminiscent of the DP World’s take over of P&O which resulted in 6 US ports being owned by DP World and what followed was an over exaggerated drama on security and others aspects. In the end the 6 ports management was sold off to other operators allowing the P&O deal to continue. Senate Banking Committee Chairman Christopher Dodd called for a ‘careful review’ to ensure that there are no security implications from the deal whereby Borse Dubai owns 20% of a US stock exchange.

I find politicians to not only be naïve but also seriously myopic. The honorable Chairman Dodd should ask for the foreign holdings report from the US Treasury department, and indeed he will realize that a 20% stake in their stock exchange is the least of the issues. Foreign Holdings of US treasury debt have increased by 50% between 2003 and 2006. In addition more than half the US current account deficit is funded by foreign government purchases of US Securities(US$448 billion in 2006). Between China, Japan and the Arab oil producing countries they hold 60% of US securities and any decision by them to reduce these holdings will cause a serious damage to the US financial system.

NASDAQ is a US$ 4 billion market cap company, hardly the sort that would cause a national catastrophe if 20% of NASDAQ is owned by Borse Dubai. Indeed as President Bush said a review of the deal is needed and Democratic leader Nancy Pelosi call the deal as being different from the ports deal and more a ‘marketplace’ issue and nothing else.

The hawks in Capitol Hill should be careful about raising the hysteria level too much on what is a simple financial transaction. Let me assure you that a 20% stake cannot do any harm to US security as it does not even give the new shareholder the power to appoint a doorman at the exchange entrance. The vulnerability of the US financial system is through the foreign holdings and more a result of economic weaknesses, as indeed a continuing slide of the US dollar makes the investments for foreigners less attractive. So stop worrying about friends buying some stock.

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