Dubai 's stake in Nasdaq causes alarms

By Bill McConnell in Washington

HIGHLIGHT: Experts question whether the minority stake will trigger national security action.

Roughly two months after President Bush signed a law that spells out how the federal government will investigate takeovers of critical U.S. assets by state-owned foreign companies, a number of politicians in Washington now sound like they wish the bar had been set a bit higher.

Following news that Borse Dubai plans to buy a 20% stake in Nasdaq Stock Market Inc. , Bush and congressional leaders vowed the deal would be given a thorough national security review. The United Arab Emirates controls Borse Dubai, and the deal will allow Dubai to become the first Middle Eastern government to own a stake in a U.S. stock exchange.

"We are going to take a good look at it as to whether it has any national security implications involved in the transaction," Bush said when asked about the deal during a news conference.

Sen. Charles Schumer, D-N.Y., said he also wants a tough review.

"This deal raises serious questions that must be answered," Schumer said. "Should we allow foreign governments to take over our financial exchanges, and how much control and influence should those foreign governments have?"

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, added that "a careful review of the Dubai-Nasdaq transaction is required to ensure that there are no negative national security implications."

At issue is an upcoming review of the deal by the Committee on Foreign Investment in the United States, the interagency panel led by the U.S. Treasury secretary and comprising senior officials from the departments of Commerce, Defense, Justice and State. Nasdaq and Borse Dubai have said they would voluntarily submit the merger to CFIUS examination, a move that takes some heat off Washington.

But CFIUS may not have much leverage to stop or condition the deal. The panel's power to influence a merger only kicks in when the acquirer is gaining actual control of an asset, and it's unclear from the details released so far whether Borse Dubai would be acquiring sufficient leverage over Nasdaq operations to be considered having a controlling interest.

Nasdaq and Borse Dubai announced a multilayered deal on Thursday, Sept. 20, in which Dubai would acquire Nasdaq's stake in the London Stock Exchange Group plc as well as 20% of Nasdaq itself. Borse Dubai, however, will control only 5% of Nasdaq's voting rights.

In addition to the stake in Nasdaq, Borse Dubai is acquiring 28% of the London Stock Exchange, and in return it is dropping out of the bidding for OMX AB , for which Nasdaq also has been bidding. Nasdaq in return will be free to buy the operator of seven Nordic and Baltic exchanges for about $3.7 billion and will take a minor position in Dubai's bourse.

In May, Nasdaq thought it had tied up a deal for OMX when the OMX board backed its offer. That support was withdrawn when Borse Dubai offered $3.96 billion in cash.

Washington lawyers specializing in CFIUS reviews say it's questionable whether the panel can influence the deal much, even in light of recent changes to the CFIUS process. On July 26, the president signed legislation overhauling CFIUS review procedures and increasing its scrutiny of sales involving critical U.S. infrastructure to entities controlled by foreign governments.

Demands for reform swelled on Capitol Hill last year after CFIUS approved the acquisition of some key port operations in the United States by state-owned DP World . The subsequent uproar led the company to sell the U.S. port operations to an American investors.

But in this case, the Borse Dubai's limited voting power might not justify intervention, said Clif Burns, a partner in the export controls practice group at   Powell Goldstein LLP in Washington. "At this level, I don't see how they could perceive a national security risk."

"Obviously the key thing is control," added Ronald Lee, partner at Arnold & Porter LLP . "If that's not satisfied, then CFIUS doesn't have much authority."

The lawyers also pointed out that it might be a stretch to say that stock exchanges qualify among the "critical infrastructure" Congress had in mind when tightening reviews of foreign government acquisitions. The presumption was that physical assets such as highways, ports and shipping terminals were the target.

Alarm was not universal on Capitol Hill. Alabama's Spencer Bachus, the ranking Republican on the House Financial Services Committee, congratulated Nasdaq and Borse Dubai on their plans "to create a global financial marketplace with operations in the U.S., Europe and the Middle East." The deal "is exactly the kind of foreign investment in U.S. companies we should foster and encourage," he said.