The focus of consolidation of European equity exchanges lies in the triangle of Deutsche Börse, Euronext and the London Stock Exchange. To the impartial, dispassionate observer, there might seem little problem with any tie-up between London and a continental European player. But to those who work and live in the markets, exchanges, like national airlines, are a mark of a country’s honour and something to be fought for.
“There is a lot of hubris about all this, there’s a lot of national prestige,” says Richard Kilsby of securities market consultancy Efficient Frontiers, who while at the LSE helped to establish its Sets trading system. “There is still something about being the biggest exchange in Europe. It doesn’t matter who is the most profitable.”
But the EU wants to free up the ability to trade and the LSE, being fully listed, remains a potential takeover target for any acquirer willing and able to make a compelling offer to its shareholders.
Although Werner Seifert and Deutsche Börse have already tried and failed once to get their hands on the LSE, Euronext is moving up on the rails and indeed is seen by some as the more likely of the two to win London over.
“There is no doubt that the LSE is the jewel in the crown and everyone is positioning for it,” says Benn Steill, senior fellow in international economics at the Council on Foreign Relations in New York.
“If one moves, the other will have to respond,” says Steill. “Although no-one has succeeded in stealing away business from home exchanges, if you had Deutsche Börse and LSE, you would have 40% market share of the European top 100. It could convince traders to do business there rather than on home exchanges.”
However, other observers think the French-led Euronext alliance may have what it takes, especially as its head Jean François Théodore, has been on something of a charm offensive recently. “Théodore has been given the freemanship of the City,” says Kilsby. “That was very much a sign of Euronext bending over backwards to be friendly with London and it working.”
However Kilsby thinks Euronext may have to digest previous deals before it can get back on the merger or acquisition trail. “It is worth looking at Euronext’s accounts,” he says. “They couldn’t do it with cash. They paid a lot of money for Liffe. Could they go back to shareholders and ask for more cash?”
And there is still a chance that LSE chief executive Clara Furse will keep her exchange independent. As Steill says: “I don’t think Clara Furse is terribly interested in doing a merger deal right now. Having said that, nothing prevents an exchange, or even another party, making a hostile bid, along the lines of OM previously.”
Clever Clara
Furse and the LSE certainly have their supporters in London. “I think she has done a very clever piece of work of keeping it away from a takeover and turning it into a strong performer in its own right,” says a senior London fund manager. “We don’t need one unified exchange anyway. It’s good to have a bit of competition around and unification has always been an idea tossed around by the intellectually bereft, in whatever field you might work.”
He adds that Frankfurt hankers after London but is not a strong enough contender. “I mean, let’s face it, even with all the tube problems, would you rather live in Frankfurt than London?
“There’s a simple way to change all this. Sort the transport out and scrap stamp duty on share trading.”
There is a lot of argument that the traditional, domestically focused, exchange model is dead. With that increasingly seeming the case, it is surely inevitable that the LSE will link up with one of its two strongest neighbours in due course. Whether it will be this year is unclear.
A strong factor in the LSE’s future will be its new chairman and various names are in the frame to replace Don Cruikshank when he retires next year. Brian Winterflood of Winterflood Securities is one. A 50-years-in-the-City veteran, he was instrumental in stopping the first approach by Deutsche Börse three years ago. He dismissed the German bid for an equal 50% participation in the LSE as “absolute nonsense”.
Winterflood is seen as having the necessary vision to strengthen and build the exchange. Sir Brian Williamson, chairman of financial derivatives exchange Liffe, is another. However, he knocked back Furse’s bid for Liffe towards the end of 2001 so he may not be first on the list.
Other possible candidates include Paul Myners, now making enemies among his former fund management peers by telling them what to do after carving out his own fortune at Gartmore.
Cruikshank, for his part, is seen as something of a cold fish. It is even mischievously suggested that he has an aversion to shaking hands with people. As one City banker says of his meetings with him: “You go to shake hands with him and your hand is left hanging in the air. It’s slightly unnerving, to say the least.”
Maybe this explains why the LSE has never concluded a deal with another exchange.
However, Steill says the LSE will make the leap soon and at that point European consolidation will take a huge step forward. “The pressures to do it are enormous,” he says. “And once that happens it will trigger off more deals, with Italy and Spain and the like.”
Not everyone agrees though. “I can’t see one exchange within three to five years,” says Brian Todd, at JPMorgan in London. “For the LSE, the Liffe thing didn’t pan out. The OM play likewise.”
Nevertheless Todd says that whether a deal happens or not, the result will be the same if other parts of the infrastructure join up as expected. “What we’ll have will look, behave and feel like one exchange. We are going to get there by connectivity rather than takeover.”
