Suitors line up for hand of LSE

The London Stock Exchange is under pressure to forge an international alliance
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The Independent Online

Like the Royal Family, the London Stock Exchange is a venerable British institution now basking in popularity after a period of trouble and strife.

Clara Furse, its chief executive since February last year, may be a woman of few words but all her rivals want to talk to her. This week, shares in the LSE have reached new highs amid fevered speculation that Ms Furse's longstanding discussions with her counterparts overseas are close to producing a joint venture or even a full-blown merger.

In November, following the failure of LSE's bid for the derivatives exchange Liffe, Ms Furse revealed she had four sets of talks on the go. Three were "exciting". She even conceded that the LSE's failed merger with Germany's Deutsche Börse two years ago would have "added value".

Now the rumour mill has moved into overdrive, even citing the Dubai stock exchange as a likely partner. The LSE was forced to issue a statement on Monday saying that while various sets of talks were ongoing, there would probably be no announcement at its annual results meeting later this month.

Yet the shares tested new highs once again yesterday. Bidders are not lining up to buy the LSE because of its reputation. With Big Bang and the introduction of electronic trading, the exchange's role as the figurehead of the City ended. More recently, the growing powers of the Financial Services Authority have seen the LSE's regulatory functions massively diluted.

For all the change going on around it, the LSE retains a stranglehold on equity trading in London, one of the world's most attractive financial centres. Overseas rivals covet access to its users, and can see rich pickings by trading in a wider range of international equities from a single trading operation. At the centre of any plan to merge two stock exchanges would be the goal of closing one of their technology platforms, and shunting all equity dealing through the surviving kit.

So high are the fixed costs of maintaining dealing platforms, the merged group might find it more cost-effective to shut both and develop a new one altogether. This is not the sort of ambition that can be achieved through a mere joint venture.

A merged exchange's greater bulk would enable it to offer users a deeper pool of liquidity. That is attractive because large trades would be less likely to have an impact on the prices of the shares being dealt.

Moreover, an enlarged exchange would also possess an advantage over rivals in attracting companies looking to float. While the so-called new issues market has been more or less dead for the last year, it is already beginning to show signs of life.

Robert Mumby, an analyst at HSBC, said: "The LSE is under pressure – only a little – from shareholders to do some sort of deal. The value of the cost savings involved means that it really has to look at all the possible deals very seriously."

Manus Costello, an analyst at Merrill Lynch, said the LSE could present compelling synergy opportunities to a partner. He said: "We think the LSE has every right to consider itself the partner of choice in Europe."

However, there would be considerable obstacles to a deal. National equity markets operate under contrasting regulatory schemes, and it is not immediately obvious who would be responsible for regulating, say, a transatlantic equity market. It would be interesting to see the US Securities and Exchange Commission sit down with the UK Financial Services Authority to debate the matter.

According to one analyst, questions about how to establish a uniform set of regulations for the enlarged group are the "single biggest obstacle" to an LSE deal.

Then there is the question of harmonising different clearing and settlement regimes. It is an arcane topic, the central issue being whether they should be owned by the exchanges that use their services. The LSE has long argued that there should be independent settlement houses that compete among themselves for business from exchanges.

So who are the runners and riders? Leaving aside Dubai, the most frequently touted partner is the Nasdaq. The bursting of the technology bubble has created no end of trouble for this company, which once symbolised the glory days of the New Economy. Its listed companies are a fraction of their former size; trading volumes are measly. And Nasdaq is feeling the pain in lower revenues.

A deal this year with the LSE might be a shrewd move if the new issues market eventually roars back into life. Nasdaq, though weakened, still has the power to lure hi-tech and biotech companies looking to float.

Then there is OM Gruppen, owner of the Stockholm stock exchange. If a Swede can manage the England football team, then why not the London Stock Exchange? Per Larsson, OM's chief executive, has already done the work, having launched a hostile bid for the LSE when it was talking to Deutsche Börse in the Autumn of 2000. His vision was to establish "LSE hubs" in six European cities, although using OM technology.

A rekindling of the iX deal with Deutsche Börse cannot be ruled out. Such a deal would create Europe's largest exchange. The Wall Street banks that now occupy most of the Square Mile were strongly in favour of iX, largely because it would have enabled them to perform cross-border trades in a single currency. But the LSE's smaller members balked at the price being offered in return for getting into bed with the Germans. Since then the LSE has demutualised and the strength of its share price suggests the terms might be different if the deal was attempted again.

The snag is that Ms Furse has vigorously campaigned against the ownership of clearing and settlement organisations by stock exchanges, which happens to be the central plank of Deutsche Börse's business model.

Jean-Francois Theodore, the chief executive of Paris's Euronext, showed how much he values the City as a financial centre when he agreed to pay £555m for Liffe in October. He immediately declared that he was waiting for a call from Ms Furse.

Finally, a deal with the Hong Kong stock exchange would arguably speed up the move to 24-hour trading.

Whoever emerges as the lucky suitor, the LSE would appear ready to succumb to the forces of globalisation that have transformed all those around it.


Werner Seifert

Chief executive of Deutsche Borse. LSE members foiled an attempt to buy the exchange in 2000. Has enough water passed under the bridge?

Hardwick Simmons

Chairman of Nasdaq, which could do with a boost. Ms Furse may be tempted if she believes the new issues market is coming back.

Per Larsson

Chief executive of OM Gruppen, owner of the Stockholm stock exchange. Failed to buy LSE in 2000, but Swedes have since found favour in Britain.

Jean-Francois Theodore

Chief executive of Euronext, owner of the Paris stock exchange. Outbid the LSE in the auction for Liffe. Would Ms Furse be on talking terms yet?