| Per Larsson | ||||||
Sitting in his office in the centre of Stockholm, Per Larsson, president and chief executive of OM Gruppen, gives every appearance of being relaxed. Yet the stakes could not be higher for him. Victory in the battle for control of the London Stock Exchange (LSE) would be a major step towards transforming OM Gruppen from a regional to a global market operator with a major say in the future structure of Europe’s capital markets.
OM Gruppen’s hostile bid has already sparked offone of the roughest takeover battles for some years. This has already claimed the head of LSE chief executive Gavin Casey and thrown the LSE into complete turmoil. Plans to merge the LSE and the Deutsche Börse in Frankfurt, the foundation stone of Casey’s strategy, appear dead in the water. And, despite talk of reviving this alliance and a friendly bid from Euronext – the new exchange created by Paris, Brussels and Amsterdam – OM Gruppen’s bid of $1.2 billion was, at the end of September, still the only game in the City of London.
There is some satisfaction in Stockholm that OM Gruppen, whose strategy is based on technological development allied to trading platforms, is a serious bidder for one of the oldest and most successful exchanges in the world. The Stockholm exchange has had a well-established reputation for innovation since 1993 when it became the first to demutualize its ownership and become a fully commercial operation.
The present owner, OM Gruppen, has continued the pace of change by creating the First fully working cross-border alliance of two stock markets and building a Nordic alliance of exchanges. It is a significant world player in the supply of software and trading systems, and is developing a pan-European electronic trading and settlement platform.
Larsson is clearly relishing the role of the modernizer, ready to save an LSE that is unable to reach its full potential because of old-fashioned working practices and an inability to come to terms with modern technology. “We want to change the management structure and run the exchange for profit. The LSE is in a terrible position at the moment as all the other exchanges are calling the shots.
Change is already happening. The LSE has no management and no strategy and it has not embraced new technology. It is in no position to ask for a second chance,” says Larsson.
Taking over the LSE is a rather different matter to merging Nordic exchanges where there were already cultural and trading links. But brokers in London can no longer afford to dismiss OM Gruppen’s frequently stated ambition to create a pan-European exchange.
The conventional wisdom, which once dismissed such talk with contempt, insisting that minnows like OM Gruppen would be swept aside by alliances between the world’s major exchanges, is now being questioned.
This view was maintained even though the evidence was growing that OM Gruppen was serious. While London and Frankfurt talked, the technology-driven Swedish firms actually started merging exchanges and have created a rapidly expanding Nordic exchange.
A win-win situation
Some bankers in Stockholm say that OM Gruppen cannot lose, whatever the outcome of its bid which will probably be decided in early November. “If they win, they have a superb business opportunity. Even if they lose, they will have gained millions of dollars worth of free publicity and it is almost all healthy as they have presented themselves as the modernizing underdog taking on the old-fashioned establishment,” says one Swedish banker.
Others are not quite so sure, arguing that a new focus on the company’s activities will reveal that its image is not quite as squeaky clean as it likes to suggest. Stockholm brokers are eager to voice their complaints about the way OM Gruppen has priced its services. This mood of unrest has not been lost on the Frankfurt exchange which has succeeded in persuading some Scandinavian brokers to join up.
“We see OM Gruppen as a monopolistic and high-cost producer in its management of the Stockholm exchange. It is a dynamic and leading developer of stock exchange systems but the clearing system charges are financing other parts of the company’s development.
There needs to be competition and the exchange would benefit from being member-owned,” says one broker.
That change is unlikely to be on OM Gruppen’s agenda. Although it is a technology-driven company, Larsson insists that management and structure are as important in creating an efficient exchange. The key, he says, is to have an independently managed exchange rather than one that is organized for the benefits of its members.
“The most important thing is to have an exchange which is commercially driven. The management must have the ability to run a for-profit organization. Even if you have the technological understanding, you will not succeed unless the exchange is run as a business. Technology is the second most important driver,” says Larsson.
Larsson makes no secret of OM Gruppen’s ambition “to become the premier organization on the exchange side” and his belief that consolidation will happen through competition in a market that has been overregulated for hundreds of years. “We have a clear vision. We believe there is a future in Europe for domestic exchanges but that their structure will change – they will be very focused operations, targeting domestic companies raising capital,” he says. “Global blue-chip companies will seek more international exchanges.”
The building blocks have already been set in place in Scandinavia with the creation of the Norex alliance, which is designed to cut costs and, by concentrating liquidity in one system, win some turnover back from London. The First stage was the linking of the Stockholm and Copenhagen exchanges – the First between two stock exchanges using the same trading system and a harmonized dealing room.
OM Gruppen has also received letters of intent from Norway, the three Baltic countries and Iceland, which will be the First to sign up before the end of the year. However the key omission is Helsinki which has persistently resisted the approaches from Stockholm, preferring instead to discuss a link-up with Frankfurt. The collapse of the plans for iX and the success of the Nordic exchange may, however, force a change of mind, say Stockholm brokers.
The seven exchanges that are committed to joining up will use the Saxess electronic trading system, which has already been supplied by a subsidiary of OM Gruppen to the Stockholm/Copenhagen exchange. The seven will also have cross-membership, and a common regulatory framework for listing, membership and trading.
The main challenge for any Scandinavian alliance, say brokers, comes from the leading shares, such as Nokia in Finland and Ericsson in Sweden. Both these shares are more widely traded in international markets, including Nasdaq and the New York Stock Exchange, than locally. Even so they remain the largest traded local shares.
New tech, new access
Technology remains at the heart of OM Gruppen’s strategy. Some 20 exchanges, including those in Australia, which operate across several time zones, use its technology.
| Storakers: organic growth cheaper | ||||||
Its latest venture is Jiway, a e100 million joint venture with Morgan Stanley. This is aimed at opening up foreign markets to small investors who have until now found dealing expenses prohibitive.
The Jiway platform can be accessed by investors through brokers who are charged e7 for trades of up to e50,000. They can buy or sell the 6,000 most popular shares on the New York, Nasdaq, London, Frankfurt, Paris, Milan, Amsterdam, Zurich and Stockholm exchanges. “This is an example of how technology can allow a new market, based on the best model, to develop,” says Larsson. “We offer a one-stop-shop to the world’s equity markets and will be able to cut the costs of cross-border private investment in half”.
Last month OM Gruppen launched an electricity exchange in London similar to the one it runs in the Nordic region and it is also planning a London launch of Market Bond Connect, an electronic auction system for trading illiquid fixed-income products.
Meanwhile technological advances are evident across the financial services landscape of Scandinavia.
The general assumption is that the internet is exclusively the province of the young whether they are at play, at work or dealing their share portfolios. In Scandinavia, that assumption would be wrong. At Swedish bank Skandinaviska Enskilda Banken (SEB), chief executive Lars Thunell points out that more than 650 of his internet banking customers are in their nineties.
This almost universal enthusiasm for the internet of Swedes of all ages allied to a long-established tradition of shareholding has enabled the country to take the lead in internet banking and broking. Financial institutions have developed services that may enable them to play a leading role in the wider European market.
Sweden has the highest level of internet use (45%) in Europe, according to Schroder Salomon Smith Barney (SSSB). That figure is expected to rise to at least 71% by 2003, because, says SSSB, “GDP per capita is towards the upper end of the European range, there is equal distribution of wealth, there is a willingness to adopt new technology and there is high PC penetration”.
Some 58% of the 9 million population have mobile phones – only Finland has a higher penetration – and more then 60% of homes have cable services. Already the telecommunications companies are bidding for the third-generation broadband licences that enable even more sophisticated services to be offered.
The key is that the presence of the mobile phone manufacturers Ericsson and Nokia not only provides a focus for the regional stock exchanges but guarantees that a new technological development to enhance Financial services is never far away.
In Stockholm in mid-September the senior managers in nearly every bank and broker seemed to have the latest Ericsson phone which enables its owners to do direct share dealing.
This will be yet another example of the ability of technology to give Scandinavia the lead in breaking new ground in the financial sector. “The Swedes know that if they want to remain competitive, they have to remain at the forefront of technology,” says Richard Josefsen of Enskilda Securities.
This reputation also attracts foreign investment. American high-technology companies such as Microsoft, Cisco Systems, Intel and Motorola have established research and development centres in Sweden to tap the local expertise. “This demonstrates that we have a creative climate,” says Hans Dalborg, chief executive of Merita Nordbanken.
A centre of internet banking
US technology companies have been buying, as well as setting up research and development operations, fuelling the enthusiasm for technology, media and telecommunications sectors. ADC Telecommunications bought Altitun. Cisco has invested $1 billion in Qeyton. Medium-sized Swedish technology companies which had been planning IPOs have instead achieved huge prices in trade sales.
These factors partly explain why Scandinavia is one of the most active centres of internet banking and broking. But they do not tell the whole story. The other key element has been the tradition of owning shares either directly or through pension funds.
“Sweden has a history of direct and indirect ownership. About 55% of the population hold shares directly – the combined total of those holding them directly or indirectly is 70%, which means 6 million out of a 9 million population,” says Niklas Storakers, chief executive of HQ.SE, a listed e-finance company that has demerged from the Hagstromer&Quiberg group.
In the past every Swede owned a share in Volvo. Since the sale of the car manufacturing side to Ford, the rump of Volvo that is quoted on the stock exchange scarcely fits the bill as a national flag carrier. Many other Swedish names have also been sold into foreign ownership.
However they have been replaced. Today every Swede is likely to want shares in Ericsson and every Finn in Nokia. There is a steady stream of new high-technology and internet companies attracting local and international investors. “The quality of ideas and companies being taken to the market is so much more sophisticated than only a few years ago. The hottest sector now is security encryption and anything else related to security on the net,” says Josefsen.
The “net culture” has meant that investors are more likely to use the technology themselves.
Storakers calculates that there are between 200,000 and 250,000 accounts on the internet.
This is an extremely high figure. It is more in numbers than the UK and France and second only to Germany. As a proportion of the population it is much higher than even Germany.
“These levels have been achieved in barely two years. If you assume there is a theoretical total of 4 million to 5 million accounts which could use internet broking and only one-third do so, we could see 1.5 million to 2 million internet accounts in a very few years. During this period it will be easier to get customers through marketing than acquisitions – organic growth is cheaper than structured growth,” he says.
As a result bankers and brokers are queueing up to offer services to their customers in the region and are looking at other European markets where they believe they have a technological lead on local banks.
There are already at least 13 institutions offering internet broking. These include five banks, which are reckoned by the brokers to “be three times as expensive and offer only one-third of the service.” Two Firms are part of traditional brokers and the rest are independent brokers such as Avanza and HQ.SE.
Avanza, whose shareholders include the British venture capital fund Catalyst, and the portal company Scandinavia On Line, was launched in January 1998. It offers share and option trading in the Swedish market, as well as financial information, and aims to have 40,000 customers by the end of the year. HQ.SE already has 53,000 clients.
Both companies have ambitions to market their products internationally. Avanza plans to expand to Germany, the Netherlands, Italy and the UK, while Storakers says that the use of the Jiway system will enable it to target more Swedish and international customers.
Scandinavian Firms have valuable insights into how to succeed in online financial services.
“One of the challenges is to offer proper customer support in each country. It is more to do with service than cost. What we have found in Sweden is that commission fees have come down to such an extent that customers are not price sensitive. They do compare service and availability,” says one broker.
The internet is also a core part of Swedish banks’ strategy for European expansion. SEB, which is accepted as the most internationally oriented of the region’s major Financial institutions, played a key role in the setting up of SelfTrade, the French internet broker.
SEB recently earned e1 billion by selling its stake in the broker, with some 30,000 customers and offices in Paris, Milan and London.
SEB plans to use the internet to acquire more customers as it expands in Europe. The bank is launching an internet brokerage in Germany and intends to have a platform in the UK by the end of the year.
It offers both payment solutions and accounts management as well as on-line trading.
According to Ronit Ghose, analyst at SSSB, SEB has a track record of being a “First-mover in technology-related banking, including internet banking”.
At the core of its corporate internet strategy is Trading Station, which enables companies to manage their own financial dealings without a broker. “It is an integrated service that no other bank can offer. You can carry out currency, Fixed-income and futures trading via the internet. It gives you real-time access to foreign exchange rates, interest rates, equity indices, commodity prices and market information,” says Lars Friberg, head of foreign exchange trading at SEB Merchant Bank.
The system, launched in 1996, has been marketed globally for a year. It is now used by more than 100 international companies and was marketed in Asia earlier this year. One example of the international success was the decision by Singapore Technologies to use Trading Station. “Their rationale is to improve efficiency with straight-through electronic processing and improved accessibility to the financial markets and information,” says William Paus, SEB’s head of trading and capital markets in Asia.
New corporates, new markets
From his office in the Stockholm suburbs, Steffan Nordin, the group treasurer of Swedish engineering company Atlas Copco, talks about his plans to set up an EMTN programme later this year. The most significant aspect of what he is saying is that the company does not actually need the money. But he wants to be prepared for the moment when it is needed.
“This will be a vital tool in the box for our company which has been involved in rapid international expansion. In the past our activity in the capital market happened because we were making acquisitions.
“Then there is a lot of time stress because you have to move very quickly to close the deal. This time, we are doing it in an orderly way,” says Nordin.
A break from tradition
This approach, which is increasingly common among the new breed of corporate treasurer in Scandinavia, is a radical transformation from the traditional attitude of companies in the region. Traditionally they have been very conservative and, says one corporate treasurer: “looked at debt as something suspicious. Nowadays they know they need to be leveraged to provide shareholder value. They see a euromarket with a real appetite for corporate credit.”
When they did need to raise money, most companies borrowed directly from their banks.
Until a couple of years ago very few would consider bonds, let alone think about raising money if they did not need it immediately.
The electricity company Birka Energi typifies this shift. It has established a mix of Swedish krona and Eurobond issues.
“In order to widen the investor base, any investment-grade company needs to look at moving from bank borrowing to the capital market. In 1998, 90% of our borrowing was short-term bank funding. At the half year this year, we had 60% from the domestic and international capital market and only 25% from traditional bank funding,” says treasurer Jan Seveborg.
Birka’s experience is common to many companies in the region. They have also received encouragement from the large Swedish institutions desperate to find another home now that the sovereign bond market in the region has all but disappeared as governments have eliminated deficits.
“Until the end of 1998, a typical Nordic company had 95% of its liabilities with the commercial banking sector. Then Metsä-Serla went ahead with the first corporate bond and was followed
by traditional names such as Volvo and Ericsson. Now even those who were sitting on the sidelines are going ahead. We know five corporates going to the market with Eurobonds and a couple more with yankees,” says Eirik Winter, head of European corporate capital markets at SSSB.
Winter reckons that about half of the 25 or so Nordic companies able to issue bonds have already done so which means that the market could be set for even more rapid growth in the next year after a phenomenal expansion since 1997.
That year international public corporate bonds for Sweden totalled only $2.3 billion. This rose to $5.5 billion in 1998, $11.7 billion last year and $8.6 billion in the First three-quarters of this year. The size of the issues is modest by the market’s standards even though Ericsson passed the e1 billion hurdle last year.
According to Thor Askeland, director of debt capital markets for the Nordic area at Lehman Brothers: “The increase in capital market issuance is driven by the need for capital and with the prospect of euro membership looming, companies want to market their names internationally.” This view is endorsed by Birka Energi. Seveborg says that “we want to fund ourselves where we have the lowest costs, but we will pay a premium to tap a new market”.
With many of the traditional Scandinavian names such as Volvo now in foreign hands, a new type of Scandinavian company is using the market. These includes Atlas Copco which now does 98% of its business outside Sweden and uses its dollar borrowings for its American activities. “We raised money on the yankee market because we had assets in dollars and it was more liquid and deeper. We could also raise 20-year money which at that time was not available in Europe,” says Nordin.
Bankers say this dramatic expansion
has come with the creation of the market in the eurozone. Scandinavian companies say it is worth paying 100 to 120 basis points over Bunds to promote themselves internationally and diversify their investor base. Of the outstanding bonds, some 49 issues – equivalent to 40% those issued by Nordic companies – have been in the new currency. There are 39 dollar issues, equivalent to 25% of the $34.15 billion outstanding, with a large number of smaller issues in yen.
Another important driver has been privatization, particularly in the telecoms sector. About 30% of the issues have been for telecom companies and, with third-generation licences likely to be expensive to establish though cheap to buy, this proportion is likely to increase.
Typical of the new telecoms companies is the $20 billion Swedish giant Telia, which has both fixed line and mobile networks. The sale of just 30% of the company boosted the market capitalization of the Stockholm exchange by 5%. Telia has made two euro issues, totalling e800 million outstanding, and, says head of group treasury, Krister Kylas, has “plans to tap the international markets further because it is deeper and has more capacity than the domestic Swedish market”.
Merger frenzy set to continue
Nordic Baltic Holdings (NBH), the holding company for Merita Nordbanken, refused to comment on market rumours that it might be acquiring one of Sweden’s other four large Financial institutions, ForeningsSparbanken-Swedbank.
| Thunell: focusing on affluent customers | ||||||
However, whatever the accuracy of this rumour, few would be surprised if there was further consolidation in a sector that has gone from virtual bankruptcy to credibility in a decade.
T he process of mergers and takeovers in the Nordic region has gone on at a frenetic pace.
Analysts are agreed that with several evenly matched banks – the others include Svenska Enskilda Banken (SEB) and Handelsbanken – there is room for more consolidation. SEB has itself been linked with ForeningsSparbanken-Swedbank. It is likely to be some time before the frenzy of mergers between banks, their merchant-banking operations and their brokers comes to a halt. Hans Dalborg, chief executive of Merita Nordbanken, says that there “will be ongoing worldwide consolidation and then we will see some deconsolidation, where one will cut the cake in new pieces.”
Banks have, however, adopted different strategies for expansion; Merita Nordbanken has adopted a Nordic strategy while SEB has taken a more international approach. Merita Nordbanken, which is the product of a merger between two Finnish banks and one Swedish bank, bought Unibank of Denmark and TrygBaltica earlier this year. Dalborg sees the focus of expansion on these countries, the Baltic states, Iceland and Poland.
“We want to have size and that is achieved by mergers with banks in markets that we know about and where we understand sectors and values.
“The natural home market is the Nordic countries. When it comes to growth there are huge opportunities in the Nordic area because of the savings pattern which provides a chance to develop asset management and pension products. But we are also open to expansion outside the Nordic countries,” he says.
At SEB, chief executive Lars Thunell is determined to transform the bank from a Nordic institution into a customer-oriented European Financial company, centred on the internet. “We have already moved from being a Nordic bank into a European one. And we are doing a lot more investment products rather than lending. We are also focusing on more affluent customers, realizing that they have more in common – whatever country they are in – than customers from the same country.”
The clearest evidence of the bank’s international focus came with its acquisition of Germany’s BfG bank for Skr13.9 billion ($1.45 billion).
“That means that we now have 200 branches in Sweden and 400 outside. A quarter of our employees are in Germany and a quarter in the Baltic states,” says Thunell.
He says that SEB also has a different earning pattern to other regional banks. “Our Swedish competitors get 65% of their net income from interest but for us it is only 35%. They are less international and less commission-driven,” says Thunell.
Stockholm bankers also say that SEB is the most successful at developing internet banking, paving the way with a direct dealing service for corporates, reflecting its strategy of focusing on high-growth companies.
It also wants to sustain its position as the leading e-commerce bank in the region. “We want to become the leading European e-centric customer-driven financial services provider and this fits in with our strategic focus on growth companies and financial institutions,” he says.
