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MARKET COMMENT
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Carburton Street, London -- What now for the London Stock Exchange (LSE: LSE)? After losing out in the three-way bid battle for LIFFE (the London futures exchange), the LSE is falling behind in the consolidation of European financial markets. And although today's interim numbers emphasise the fundamental investment attractions of the Exchange, questions remain over the LSE's management and their strategy. Certainly the LSE's bid for LIFFE looked very ambitious. By offering £580m for its smaller cousin, a price that valued the futures exchange at over 40 times prospective earnings, synergies had to found quickly. But with the LSE's offer underpinned by the prospect of a bold new integrated IT platform, merger benefits looked only a distant possibility. Thankfully for both sets of shareholders, LIFFE quite rightly rejected the LSE's approach. But even with management's attention directed towards empire-building, the financial performance at the LSE has remained reasonably buoyant. Turnover at the LSE was up 15% to £103m in the first half, with pre-exceptional operating profits rising 14% to £34.2m. Even with a falling stock market and a drought of new issues, increased trading volumes and greater demand for the Exchange's data still managed to drive revenues notably higher. With operating margins at a mouth-watering 33% and profits rising in the face of tough market conditions, it's obvious the LSE is an inherently strong business. However, the attractions are tempered by the present management, who, judging by their LIFFE bid, appear far too ambitious. The LSE should limit possible corporate get-togethers to just the smaller European share bourses, while directing most of its expansionary attention to providing its dealing system to other exchanges. That strategy may not make the adrenalin pump in the LSE's boardroom, but it certainly reduces the risk of shareholder value being destroyed through an overly ambitious takeover. More: London Stock Exchange: The Meaning Of LIFFE | London Stock Exchange discussion board