Business Analysis: The ins and outs of the battle for the world's oldest share market

Why is everyone so keen to buy the LSE - and will its users notice any difference?
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The Independent Online

With the continental rivals Deutsche Börse and Euronext vying to take over the London Stock Exchange, it is almost certain its days as an independent entity are numbered. How did the world's oldest share market end up in the situation of being the hunted rather than the hunter?

Why is everyone so keen to buy the London Stock Exchange?

As the biggest equity market in Europe, the LSE is the most coveted prize amid the consolidation of European exchanges. An LSE acquisition will bring growth opportunities mainly in the equity trading area (consolidation has already happened in European derivatives) as well as offering useful cost savings amid ongoing pricing pressure on European exchanges.

Why does the LSE appear to accept it will be taken over?

The LSE has agreed to discuss a takeover bid with Deutsche Börse and Euronext but has not had a formal offer from either side. If it does receive a formal offer and the price is sufficiently attractive it will have little choice but to accept, although competition issues might complicate things further.

Critics point to the LSE's history of mismanagement and missed chances. It failed to buy Liffe, the derivatives exchange, which was instead sold to Euronext. The decision to remain focused solely on equity trading, leaving clearing and settlement to others, was similarly misjudged. Deutsche Börse became Europe's largest exchange operator through the acquisition of clearing and settlement houses, which provide a large part of its revenues. Euronext also owns chunks of clearing and settlement businesses.

Will users notice any difference?

Both Deutsche Börse and Euronext are understood to want to run a combined company out of London. That would mean few changes for users, with the Financial Services Authority likely to remain the lead regulator. Some users are worried, though. APCIMS, the body that represents private client brokers, wants a guarantee that users can choose who clears and settles their trades.

Will it mean cheaper share dealing costs?

Deutsche Börse is offering significant price reductions to users of a combined exchange and Euronext could follow suit. But there are fears that if Börse wins, it would eventually force customers to use its clearing and settlement systems which could mean higher costs.

What is Deutsche Börse proposing?

Deutsche Börse has offered to give Clara Furse, the head of the LSE, the chance to run the merged company's equities businesses out of London, and to move management of the Eurex derivatives exchange from Frankfurt to London. Deutsche will also appoint seven non-executive directors from the City of London to sit on its supervisory board. To reassure the LSE's users, Börse has pledged not to touch the existing clearing and settlement arrangements. Last month the LSE rejected Börse's informal offer of 530p a share, valuing the LSE at about £1.3bn, as too low.

But aren't some of Deutsche's shareholders trying to block the bid?

The Children's Investment Fund Management (TCI), a hedge fund which owns over 5 per cent of Börse's shares, has called on the board to drop its LSE bid and instead return cash to shareholders. Other investors supported TCI yesterday, but German company law allows a board to go ahead with a takeover offer without consulting its shareholders.

TCI's 5 per cent stake did allow it to request an extraordinary meeting to call for the removal of Börse's entire supervisory board - which would require backing from 75 per cent of Börse shareholders.

What is Euronext proposing?

Euronext, which runs the Paris, Amsterdam, Brussels and Lisbon exchanges, has yet to put a price on its bid. All it has said is that its offer would be solely in cash, but speculation has centred on a bid of about 580p a share. Jean-Francois Theodore, Euronext's chief executive, believes big cost savings can be made from combining the two companies. Euronext already generates over half of its business in London, where it operates the derivatives exchange Liffe. Euronext's trading platforms are similar to those of the London exchange.

Surely in the end it will come down to a simple matter of price, won't it?

Although Ms Furse is determined to get the best price for her investors, the LSE battle is about more than money. Börse has more financial firepower than Euronext, but it has come under fierce pressure from rebel shareholders and the German government, which is opposed to a move of its headquarters to London.

What's all this talk about "vertical silos"?

Euroclear, the pan-European settlement system used by Euronext for three of its exchanges (bar Lisbon), has muscled into the battle, accusing Börse of trying to create a monopoly over trading, clearing and settlement through its bid for the LSE. Börse has been heavily criticised for operating a "vertical silo" through its ownership of trading, clearing and settlement businesses, boosting its pricing power. For instance, when customer complaints forced the LSE, Börse and Euronext to cut their tariffs last summer, Börse put up its settlement charges at the same time. Meanwhile, Euronext also owns chunks of LCH.Clearnet and Euroclear/ Crest, and both its chief executive Jean-Francois Theodore and the LSE's head Clara Furse, sit on the board of Euroclear.

Won't the competition authorities want to examine the whole deal?

It is quite possible that both takeover bids will eventually end up before the European Competition Commission. Legally, both Börseand Euronext need to file their bids to the UK's Office of Fair Trading as they are not big enough to merit the attention of Brussels, but the OFT can pass a case on if it thinks Brussels would be better placed to handle the inquiry. Börse's vertical silo structure could raise competition issues, while merging the listing and trading functions of the two exchanges would be of less concern as the combined group would control less than 50 per cent of European equity trading. The LSE currently has a market share of 28 per cent, Börse 14 per cent and Euronext 23 per cent.

What's in it for the LSE's chief executive Clara Furse and will she stay on?

If Börse succeeds in its bid, it will offer Ms Furse control of the merged equity businesses in London. It is not known what Euronext is offering her. Ms Furse holds options over 766,494 shares, 50,608 unvested share awards and options over a further 6,048 shares through the LSE's employee save-as-you-earn scheme. The options would yield a profit of about £2.4m at yesterday's closing price of 580p, and a profit of £1.99m at the 530p a share offer by Börse. Ms Furse and her husband also own a further 287,400 shares in the company worth £1.7m at yesterday's closing price.

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