The New Capital of Capital

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Having cemented its leadership in Europe, London today is quickly gaining ground on New York City. While the combined market capitalizations of U.S. companies listed on the n.y.s.e. and nasdaq dwarf the City's London Stock Exchange (lse), London has proved far better at attracting the new share listings that investment banks crave. In 2006, for example, 91 foreign companies chose to sell new shares on London's stock exchanges — more than four times the number of overseas listings in New York, according to consultants PricewaterhouseCoopers. London's smaller domestic business means that "if you're going to flourish, you have to look around," says Richard Lambert, director general of British business lobby group the cbi. Likewise, London is building on an already leading stake in international bank lending and over-the-counter derivatives, and foreign equity trading. Attention-getting statistics like that helped motivate nasdaq to launch a $5.3 billion hostile takeover bid for the lse in November. In a high-drama war that's playing out in the British newspapers, the lse has consistently and indignantly rebuffed the approach.

London owes much of its recent success to its lighter regulatory touch. In 1997, Britain's government brought an overdue end to a complicated and largely self-regulatory system with the creation of the Financial Services Authority (fsa). As lines between financial markets and firms blurred — telling a bank from a stockbroker was becoming more and more difficult — a one-stop regulatory authority, parliament concluded, appeared best suited to serving the industry. (For companies operating in the U.S. and much of Europe, no such single body exists.) The fsa's remit: working with firms to pinpoint potential risks long before things go wrong, rather than simply prescribing rules. While the U.K. watchdog listens, suggest industry representatives, U.S. regulators prefer to bark. The U.S. Sarbanes-Oxley Act, a 2002 response to the accounting scandals that toppled Enron and WorldCom, was intended to stiffen standards of corporate governance in public firms. In reality, the cumbersome auditing requirements — not to mention the cost and time involved in complying — have put many firms off listing on U.S. stock exchanges.

The headaches caused by Sarbox, as it is sometimes called, have worked to London's benefit. From Russian Big Oil (Rosneft) to a Peruvian silver mining group (Hochschild), international businesses together raised $19.6 billion on London's exchanges last year. The number of international firms on the lse's Alternative Investment Market (aim) — the lightly regulated bourse for small-cap companies — has doubled in the past two years to more than 300 (prompting accusations from the n.y.s.e. that aim lacks rigorous enough standards; the lse said the claims appeared "to indicate a misunderstanding about the operation and regulation of aim.") The lse has intentionally concentrated its attention on companies from India, China and Russia. "We focus on countries where the domestic capital markets are relatively immature and not sufficiently developed to meet the capital needs of high-growth economies," says Martin Graham, director of markets at the lse. But it's not just over-reaching regulation bringing firms to London. The underwriting fees investment banks charge companies listing on the stock exchange are typically twice as high in New York than in London, according to a report published last June by Oxford-based Oxera Consulting.

This confluence of positive factors has helped the lse post record stats in a host of categories. The lse's operating profits for the nine months to 2007 more than doubled to $253 million, and the volume and value of shares traded on the exchange's markets hit all-time highs last year. With its own share price more than tripling in the last three years to around $25.4, lse's board swatted away nasdaq's bid of $24.4 a share as "wholly inadequate." nasdaq which has already built up a 28.8% stake in lse, has until Feb. 10 to persuade the lse's shareholders otherwise.

That will be a tricky prospect, considering the lse has seen off a succession of foreign takeover attempts in the past few years. Under ceo Clara Furse — the bourse's first female boss in its 200-year history — the lse has knocked back offers from rival European operators like Deutsche Börse and Australian investment bank Macquarie. By "flushing out suitors and garnering shareholder support," says Richard Hunter, London-based head of U.K. equities at Hargreaves Lansdown Stockbrokers, Furse and the management "have played the bid game very well indeed." But the laws of capitalism dictate that the lse must have its price, and a handsome bid could yet win the day. That is, if it isn't preparing to go on an acquisition tear of its own. Don't rule out the exchange "becoming the predator, rather than the prey" sometime soon, says Hunter.