Xavier Rolet, the chief executive of the London Stock Exchange, was drowning his sorrows last week, his expansion plans potentially in ruins.
Across the Atlantic, Bob Greifeld, the head of the Nasdaq stock market, was equally dejected, his own ambitious takeover plans thwarted. Surely the jilted exchange heads should get together and plot a united future?
The London exchange has twice rejected Greifeld's overtures in recent years, but now both Rolet and Greifeld face a common threat – the creation of a global competitor combining the stock markets of New York, Paris and Frankfurt. Consolidation of the world's stock markets is a painfully slow process, but until last weekend, Rolet believed he was slotting together two pieces of the giant jigsaw. Taking over Canada's exchanges was not the biggest expansion but it added to London's earlier purchase of Italy's market.
His excitement at agreeing a transatlantic deal had already been punctured once. In February, just a day after announcing the deal with TMX, owner of the Toronto exchange, he was trumped by Deutsche Börse's announcing a much bigger takeover of NYSE Euronext, owner of the Paris and New York markets.
If that worried Rolet, it frightened Greifeld. The Toronto takeover might seem small fry compared with Frankfurt's deal, but the New York Stock Exchange's latest expansion would leave its US rival looking tiny. Greifeld retaliated by joining with ICE, the Intercontinental Exchange, to counter-bid for NYSE Euronext.
Rolet's Canadian bid had started a round of consolidation among his rivals but it was still to his advantage if Nasdaq won NYSE. That would mean Europe's three major stock markets remaining under separate ownership, with London the largest even if the combined US exchanges were bigger still.
Eight days ago – unruffled that it was Friday the 13th – Rolet announced a 22 per cent increase in profits, told shareholders the Toronto deal was on track and filed merger applications with provincial regulators in Ontario, Quebec, Alberta and British Columbia. Then, over the weekend, his plans started to unravel.
Despite TMX backing the London bid, nine Canadian banks and pension funds clubbed together to propose a counter offer. Naming their vehicle the "Maple Group Acquisition Consortium" might demonstrate its blatant patriotic or protectionist intent, but, unlike Rolet, it is offering cash and a premium above the market price, and looks a likely winner.
Andworse news came just a day later. Nasdaq, warned by the US Department of Justice that merging with its New York rival would create an unacceptable monopoly, withdrew its bid. That dashed Rolet's hopes of it preventing Frankfurt and Paris uniting under common ownership.
Rolet refuses to accept that his TMX offer is sunk. Canada's Competition Bureau could block Maple's offer – even though the country's Finance Minister, Jim Flaherty, has made clear his opposition to a London takeover. There is plenty for concern: the bidding banks, which own the brokers using the exchange, would inject their rival Alpha share trading platform plus the country's clearing system into TMX beside the Toronto stock exchange, Montreal futures market and Calgary Venture Exchange. Although the TMX board came out in support of the London bid yesterday, the Maple offer may still appeal to disgruntled shareholders.
Trying to match Maple's terms would stretch Rolet. His original terms gave TMX owners 45 per cent of the bidder's stock with his existing holders retaining 55 per cent. Lifting his offer to Maple's level would reverse those ratios but still not satisfy the patriots who object to a foreign parent.
Rolet's shareholders would rather he drop the bid than overpay, saying the deal was always more important to Toronto than London. Charles Coyne of City brokers Arden Partners says: "What was London going to get out of it? Canada is a small place where the mining sector predominates. Why they wanted to be in Canada I do not know."
London's revenues are 50 per cent higher than TMX's, and its profits double. Many of Toronto's listing volatile resources companies and small firms. And Glencore, the world's biggest commodities group, is floating in London and Hong Kong – and not in Toronto, despite the Canadians' specialisms.
Rolet may think he does not need the distraction of a Canadian takeover when his competitors are uniting across the Channel. Euronext was created by combining the small Belgian and Dutch markets with Paris. However, Frankfurt always remained independent, ensuring competition in European markets. Uniting any two would be a threat to the third.
That was London's thinking in 2000 when it agreed a merger with Deutsche Börse – only to see it rejected by its member firms. A cheeky bid immediately afterwards from Sweden's OMX exchange – now owned by Nasdaq – was easily dismissed, but Frankfurt returned in 2005 with an offer that provoked Euronext to consider counter-bidding before it agreed the NYSE merger. Macquarie of Australia also eyed London then, as did Nasdaq, which made two bids in quick succession.
Clara Furse, Rolet's predecessor, fought off those suitors, but she left in 2009. He may find it easier to open talks with Greifeld, and the New Yorker may be less demanding now than then.
Nasdaq made its name dealing in tech stocks during the dot.com boom and it suffered when the bubble burst. The price of shares quoted there tumbled almost 80 per cent, and the number of companies listed fell by a third. Greifeld was recruited in 2003 to rescue the computer-based exchange, and closed the unsuccessful Nasdaq Europe and Nasdaq Deutschland to cut costs. Since then, he has tried to return to Europe.
His background is IT rather than finance, but now all exchanges are embracing technology that is breaking down geographical borders and smashing monopolies. The London Stock Exchange's share of its own market has fallen to 64 per cent as alternative platforms steal share.
And falling fees have changed the business model of exchanges, forcing them to cut costs and seek alternative revenues. The figures published by Rolet just before his disastrous weekend showed falling equity trading in both London and Milan, and profits are still below 2009's level despite a 4 per cent cut in UK costs last year. He has signed deals in Mongolia and Egypt to sell London's skills, but that is not the same as a takeover.
Rolet had hoped to save £35m a year in costs from the TMX deal and generate the same in extra revenues, but appeasing the Canadians would have been expensive. Thomas Kloet, who would remain TMX chief executive after a merger, emphasises that the combined group would have two headquarters and separate Canadian boards. "This merger represents a pooling of ownership at the holding company level and is not in any way a merger of exchanges," he said.
Greifeld was looking for synergies of $700m from his $11bn [£6.8bn] bid for NYSE Euronext, however, and he talks of how a London merger could pool liquidity between Nasdaq and the City. In 2006 he offered £12.43 a share for London: with the share price now just 885p Rolet's exchange is valued at £2.4bn.
Nasdaq would provide Rolet with a better transatlantic link than Toronto, and, Coyne says: "It would make much more sense." But there would be location issues, even if NYSE has accepted German ownership and there are other options – not least a link with Hong Kong, which is valued at six-times London's price.
But a trophy closer to home may await Rolet. The London Stock Exchange bid to buy Liffe, the City's futures market, in 2001, but was humiliatingly beaten by Euronext. However, if EU regulators prevent Deutsche Börse adding Liffe to its own Eurex futures market, Frankfurt may have to resell the London derivatives exchange. And whether or not a bid by London Stock Exchange for Liffe looks patriotic, it would be a valuable consolation prize for Rolet.
Exchanges' deals and no deals
The plans that didn't happen...
2000: London members veto merger of Deutsche Börse and London Stock Exchange
2000: LSE rejects an offer from Swedish
2001: Liffe rejects bid from LSE
2005: LSE fights off Deutsche Börse offer
2005: Euronext overtures shunned by LSE
2005: Nasdaq rebuffed by LSE
2006: LSE again rebuffs Nasdaq bid
2007: ICE bid for Chicago Board of Trade (BoT) fails
2011: Canberra blocks Singapore bid for Australian exchange
2011: Canadian banks counter LSE bid for TMX
2011: Nasdaq/ICE offer for NYSE Euronext blocked
And some that succeeded...
2001: Euronext buys Liffe
2001: ICE merges with International Petroleum Exchange
2007: NYSE takes over Euronext
2007: Chicago BoT and Chicago Mercantile Exchange merge
2007: NYSE buys American Stock Exchange
2008: CME buys Nymex