LSE shares jump 10 pct on merger, costs potential

By Daisy Ku

LONDON, May 16 (Reuters) - Shares of the London Stock Exchange (LSE.L: Quote, Profile, Research) jumped as much as 10 percent on Friday on a report that Europe's top stock market could offer upside potential if merger interest resurfaces or via cost reduction.

Its shares have fallen more than 40 percent from 2002p each in January, to trade roughly 30 percent below global exchanges' average valuation of 21.5 times 2008 earnings as investors worry about slower listing activity and falling trading yields.

"We believe if the sell-off should continue, LSE management or some activist shareholder or private equity firm could force a significant cost savings programme," wrote Bernstein Research analyst Dirk Hoffmann-Becking in a report published on Thursday.

He also pointed to potential transatlantic bids. "We believe that at prices below 10 pounds, M&A options for Nasdaq and NYSE may return to the table."

LSE shares jumped as much as 10.1 percent to 1,198p on Friday before closing at 1,143p each.

At that closing level, LSE shares trade at 14.3 times 2009 March earnings per share of 79.7p, compared to NYSE Euronext's (NYX.N: Quote, Profile, Research)(NYX.PA: Quote, Profile, Research) 27.5 times, Nasdaq OMX's (NDAQ.O: Quote, Profile, Research) 19.5 times and Deutsche Boerse's (DB1Gn.DE: Quote, Profile, Research) 18.5 times.

While the LSE employs some 450 staffs, new pan-European trading ventures such as Nomura-owned (8604.T: Quote, Profile, Research) Chi-X Europe and Turquoise are running on headcounts of under 40.

While the LSE invested 40 million pounds ($77.85 million) on its new trading engine TradeElect to deliver sub-10 millisecond latency, U.S. rival BATS spent around $5 million in building a next-generation trading platform.