LSE's diversification strategy pays off

The London Stock Exchange's determination to widen its trading activities continues to pay off, with the group reporting a 50% increase in annual revenues on Thursday.

Sales were buoyed by a strong performance from its capital markets business, which has benefited from a surge in IPO activity, as well as the acquisition of LCH.Clearnet, the clearing house.

Total revenues for the year to 31 March were £1.08 billion compared to £726.4 million last year.

While LCH.Clearnet accounted for £263 million of the increase, capital markets also performed well, with sales up by 16%. That business has benefited from income earned during the flotations of businesses such as Pets at Home, Just Eat and Poundland this year - companies have raised more than £34 billion of equity on LSE's platforms over the past year.

Profits also rose at the company, with LSE posting a 17% increase in pre-tax profits to £445.9 million. The company's margins were helped by much better cost savings related to the acquisition of LCH.Clearnet than expected - LSE has so far identified £49 million of savings compared to £18 million it had originally expected.

The company's strategy is to continue making acquisitions where possible - it confirmed today that it is one of several bidders for Russell Investments, the US stock index and asset management firm - but chief executive Xavier Rolet warned that in some areas where the business wanted to grow, there were no suitable targets.

For example, LSE is determined to expand its futures division, but Rolet said: "There are no futures platforms for sale, so our approach will have to be organic."

The group's shares responded positively to the update, rising more than 2% to 1,839p by lunchtime on Thursday. LSE said it now planned a final dividend of 20.7p a share, 4.5% more than last year.

More to come?

Xavier Rolet will have been running the London Stock Exchange for five years next week and has a strong track record of sales growth.

LCH.Clearnet is turning out to be an even smarter acquisition than previously thought, boosting sales and offering up more savings than anyone anticipated. The global economic recovery, which has boosted capital markets, has been helpful too of course.

Competition in the exchange sector remains fierce, with new rivals emerging all the time in key business areas for LSE, often with agile technology-based business models. So far, however, LSE has been able to hold its own - and resolving the technical glitches that seemed to dog its own systems for a period will have helped.

The Russell Investments potential acquisition is an interesting one, though LSE won't have a clear run at the sale. Revenues from its information business are already growing and a business with a strong index franchise in the US would perfectly complement LSE's FTSE business in Europe.

There was a time not so long ago when analysts wondered whether LSE had missed the boat as stock exchanges around the world engaged in M&A activity. However, the company has caught up admirably quickly.