Dubai Agrees To Acquire 20% Stake in Nasdaq Market
3 Mideast Nations Seek Major Stakes in West

By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, September 21, 2007

NEW YORK, Sept. 20 -- Middle Eastern governments announced a series of billion-dollar deals Thursday that would give them stakes in financial institutions at the heart of Western capitalism, raising concerns in Washington about sensitive foreign investments.

Under a complex three-way deal, the stock exchange owned by the government of Dubai would acquire a 19.9 percent stake in the Nasdaq Stock Market, becoming the first government in the Middle East to own a substantial interest in a U.S. exchange.

Separately, Carlyle Group of the District said it was selling a 7.5 percent share of its general ownership to an investment group owned by the government of Abu Dhabi, which like Dubai is part of the oil-rich United Arab Emirates. The Qatar Investment Authority, a government investment fund, said it bought a 20 percent stake in the London Stock Exchange.

The transactions are the latest examples of governments of emerging economies, rich in natural resources and with healthy foreign-exchange reserves, buying shares of some of the biggest names in business. In May, as the private-equity firm Blackstone Group took itself public, the Chinese government paid $3 billion to buy a 9.7 percent stake in the IPO.

The governments seek to diversify out of their concentrated foreign investments in U.S. government bonds into higher-yielding assets.

"They're swimming in cash," said Benn Steil, director of international economics at the Council on Foreign Relations. "They're looking for things to do with it."

The foreign investments have been followed closely by lawmakers, some of whom expressed uneasiness Thursday over the Nasdaq proposal.

Sen. Charles E. Schumer (D-N.Y.), who heads the congressional Joint Economic Committee, called on Treasury Secretary Henry M. Paulson Jr. to investigate the deal.

"At this early stage this deal gives me pause," Schumer said in a statement. "While I am and have been a big proponent of foreign investment in the United States, we must still be careful of the kinds of investments made in our critical infrastructure, financial exchanges, utilities, and other areas that are vital to the operation and security of our country."

Schumer said the Dubai exchange "is majority owned and controlled by the government of Dubai, which has previously been cited as a nexus of terror financing, money laundering, and a potential crossroads for shipping and trading for Iran in their quest for nuclear materials and technology."

The lawmakers and Dubai investors recalled the attempt by Dubai Ports World to take operating control of terminal operations at several major U.S. seaports last year. The proposal set off a political backlash among critics who did not want to put any part of U.S. border security in the hands of an Arab government. The company eventually abandoned the plan.

In July, President Bush enacted legislation seeking to ensure high-level scrutiny of direct foreign investments in U.S. assets that are critical to national security.

By Thursday, a flurry of lobbying was taking place on Capitol Hill. Nasdaq representatives briefed congressional staff members Wednesday night about the deal while Nasdaq's president, Robert Greifeld, made some calls. Among the law firms talking to lawmakers about the transaction are Akin Gump Strauss Hauer and Skadden, Arps, Slate.

In an interview Thursday, Greifeld said the deal includes safeguards that should address some lawmakers' concerns. Nasdaq's corporate charter, he said, limits the voting rights of any shareholder, no matter how large its stake, to 5 percent. The proposal, which gives the Dubai exchange two of Nasdaq's 16 board seats, also prevents Dubai from increasing its stake for 10 years.

Greifeld also said, the deal would be voluntarily submitted to review by the Committee on Foreign Investment in the United States, an interagency committee of the federal agency.

"We have lined up what we need to do and we're going to carry through with it," Greifeld said.

Several observers said that the Nasdaq deal has a better chance of succeeding than the failed bid for management of key U.S. ports. Dubai's stake in Nasdaq would be a minority stake, they said, albeit a significant one.

"They're not going to be able to control the franchise," Steil said. "From Dubai's perspective, their main purpose is to buy credibility from abroad."

Despite the notes of caution, most politicians maintained a neutral stance on the deal, saying they would await the result of the federal review.

Among the supporters was New York Mayor Michael R. Bloomberg (I). The transaction, he said in a statement, "appears to be good news for both New York and the nation, especially because it gives our City a significant leg-up on our competitors in Europe."

"Of course, like all such deals, this one should undergo all the appropriate scrutiny -- but I hope that that discussion does not devolve in the kinds of demagogic attacks that could cost Americans jobs and threaten New York's place as the financial capital of the world," he said.

The world's biggest stock exchanges have transformed themselves in recent years, converting from club-like groups serving a handful of seat holders into publicly traded companies responsive to their own shareholders' needs. Driven by a profit motive, these exchanges are now jostling to gain a competitive edge.

The Nasdaq deal is part of a broader deal under which the Dubai exchange would also take a 28 percent stake in the London Stock Exchange and Nasdaq would control the OMX, a stock exchange based in Stockholm. Dubai is getting the London Stock Exchange shares from Nasdaq, which had accumulated the shares in a failed effort to buy the premier British exchange.

The three-way deal gives Nasdaq's Greifeld what he has long desired, an exchange with a global footprint, while giving the fledgling Dubai Borse an edge in its efforts to become a financial center. It also brings to an end a month-long bidding war between the two exchanges over the OMX. The OMX is smaller than the Euronext exchange, which merged with NYSE Group, Nasdaq's rival. The OMX is considered a global leader in trading technology.

The approach of seeking substantial minority shares, rather than whole firms, would likely serve foreign governments well as an increasing number set up sovereign-wealth funds, use to help manage national savings, some analysts said.

Taking stakes in private-equity firms adds a layer between the foreign government and U.S. companies, providing further protection against accusations of corporate takeovers of U.S. assets, said Raghuram G. Rajan, professor of finance at University of Chicago's Graduate School of Business and former economic counselor at the International Monetary Fund.

"You're basically saying, 'I'm investing in Carlyle, which is going to manage a portfolio, and there's no way I'm going to exert influence.' " he said. "You're getting the diversification without the additional baggage of concerns about government intervention."

Staff writers Thomas Heath and Jeffrey H. Birnbaum in Washington and staff researcher Richard Drezen contributed to this report.