LSE under threat as Euronext and NYSE agree deal

A $20bn (£10.6bn) merger of equals between Euronext, the pan-European exchange, and the New York Stock Exchange is set to be unveiled today, creating the world's biggest trading platform.

The deal will be the first tie-up between exchanges from Europe and the US and represents a blow the London Stock Exchange, which will find it harder to attract companies from China and Russia.

The LSE is being frozen out of a possible combination with the other two exchanges, both of which have in the past held separate takeover talks with the LSE, and the London market could fall to the US technology exchange Nasdaq instead.

Advisers to Euronext and the NYSE were working frantically over the weekend to put the finishing touches to an all-share merger, which is to be put to the Euronext board today before its annual meeting tomorrow.

By removing the NYSE from the long-running global consolidation battle, the merger would clear the way for Nasdaq to bid for the London Stock Exchange unchallenged. The deal will put further pressure on other major exchanges such as Deutsche Börse, which is also wooing Euronext after failing in a takeover bid for the LSE last year and risks becoming isolated by the current wave of consolidation.

The City is looking to the LSE, led by Clara Furse, to deliver strong annual results on Thursday to strengthen its position against unwelcome suitors. On Friday, Nasdaq lifted its stake in the London market to 25.1 per cent, the fifth time it has increased its holding since acquiring a 15 per cent stake last month. It was forced to scrap a £2.4bn takeover offer after failing to win the LSE's backing, and under Takeover Panel rules cannot bid again until the autumn. Nasdaq's control of more than a quarter of the LSE's shares means it can block certain corporate transactions and thus makes the LSE a less attractive target for other bidders such as the NYSE.

The merger between Euronext and the NYSE is expected to create a management board in New York led by John Thain, NYSE's chief executive, and his opposite number at Euronext, Jean-François Théodore, but the two exchanges will probably remain separately regulated. Euronext is under pressure to finalise a tie-up with the NYSE before its annual meeting tomorrow, when several shareholders have threatened to back a rival merger proposal from Deutsche Börse, the operator of the Frankfurt exchange.

The London-based hedge fund TCI has lodged a resolution in favour of a merger with the German exchange, and the US hedge fund Atticus had warned it would vote in favour of the resolution unless Euronext came up with an NYSE deal.