Jeremy Warner's Outlook: Euronext declares surprise entente cordiale with New York's Anglo-Saxon predators

Credit Agricole targets A&L: how odd; Parallels with 1994 as markets dive again
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The Independent Online

So much for the special relationship. If Clara Furse, chief executive of the London Stock Exchange, had assumed she could play Nasdaq off against the New York Stock Exchange, she's had a rude awakening. In fact it is Euronext which all along has most interested the NYSE's still relatively new chief executive, John Thain. The LSE seems to have been only a flirtation.

At first blush, Euronext seems a curious match from a nation which was so appalled by French reaction to the invasion of Iraq that it rechristened "French fries" as "Freedom fries". Yet to think of Euronext as just the Paris bourse fails to reflect the reality.

As it happens, Euronext is these days a genuinely pan-European collection of assets whose domicile and head office are in the Netherlands. Moreover, as much as half the group's revenues and employees now hail from London, thanks to Liffe. In some respects, the company is as British as the LSE, right down to the redoubtable presence of Sir Brian Williamson, one of Liffe's founders, on the Euronext board.

All the same, hardly anyone would have thought that the first substantive cross-border deal between exchanges would have been New York and Paris when the great dance began some six years ago with abortive plans to merge the London Stock Exchange with the Frankfurt cash and futures market, Deutsche Börse. Since then, just about every conceivable combination has been exhaustively explored, yet the cultural differences alone, you might have thought, would have ruled out the NYSE and Euronext.

Not so. In securing the hand of arguably the most attractive partner, Jean-Francois Theodore, wily old fox that he is, has played a blinder. For the Euronext chairman, the alternative marriage to Frankfurt was never an attractive proposition. Deutsche only ever wanted to buy essentially for the purpose of closing Euronext down.

The job losses might have been difficult to sell politically, and the whole thing was in any case riddled with competition concerns. It is a measure of how far the debate in Europe has moved on that an American takeover is now seen as preferable to the Franco-German tie-up which once would have been waived through by the business and political elite as in some way a logical part of the European project. Nor, in Euronext's view, are the revenue or even cost synergies to be derived from merging with Deutsche Börse likely to be as good as the NYSE.

The only obvious downside in the deal that I can see are the valuation differences, with NYSE paper much more highly valued than its European counterparts. No wonder Mr Thain was able to insist that the transaction would be earnings accretive. Given that the great bulk of the deal is in shares, he's buying in earnings at a fraction of the price they sell at in New York.

None the less, the opportunity to create a common trading infrastructure, as well as a single pool of liquidity between Europe and the US, ought to outweigh any doubts among Euronext shareholders. This is a deal that deserves to succeed, even if the possibility of a higher counter offer from Deutsche Börse cannot yet be entirely discounted.

Where does all this leave the London Stock Exchange? The LSE still has Nasdaq, even if this would now be something of a shotgun marriage if it happens at all. Nasdaq is also the smaller exchange in terms of market capitalisation, and might struggle financially further to add to its 25 per cent stake.

It's been said a thousand times but it is worth saying again. Ms Furse's biggest mistake was in not paying up for Liffe, or rather, in alienating Sir Brian and others during the negotiation. Instead, the London futures market went to Euronext, where it seems to have been Mr Theodore's biggest bargaining chip in his negotiations with the NYSE.

Credit Agricole targets A&L: how odd

The Independent broke the story of Crédit Agricole's interest in bidding for Alliance & Leicester, yet I still struggle to understand why the French bank would want to acquire this backwater of the British banking scene.

Crédit Agricole is a very curious animal indeed by Anglo-American standards. Part mutual, part publicly quoted, it is in essence a federation of numerous little regional farmers' cooperatives. It also has one of the highest cost-to-income ratios anywhere in the banking world. Perhaps it wants to buy Alliance & Leicester as a learning experience, for it is hard to see what other attractions A&L might hold for the French behemoth.

Crédit Agricole is said to have done badly out of the Basel II capital adequacy rules, while as a mortgage bank A&L does comparatively well, with lots of surplus capital to throw around. Yet balance sheet engineering is never a good reason for buying a company. With very little presence here in the UK, Crédit Agricole's opportunity for cost and revenue synergies must be limited.

The same is not true of Banco Santander, which already has its bridgehead into the UK market through Abbey National, and could presumably gain substantial cost synergies by crunching the two together. Yet the Spanish bank seems lukewarm about the prospect. The disynergies of the merger process frequently cancel out any supposed benefits. In banking, local opposition to branch closures may make the cost cuts so derived largely self defeating. Crédit Agricole hugely overpaid for Crédit Lyonnais a few years back. Can it be persuaded to do the same again with A&L? It's a mutual, so anything is possible.

Parallels with 1994 as markets dive again

The London stock market received another hammering yesterday, taking the fall in the FTSE 100 since the year-to-date peak on 21 May to 10 per cent and leading to fears of an outright crash. In Mumbai, equity trading was suspended for an hour after stocks fell by one-tenth in early trading.

Investors have looked to historical parallels in their search for explanations. I've already pointed to 1998. Others cite 1987, a crash so serious that it prompted the Government to cut interest rates - ministers still set rates in those days - thus stoking the latter stages of the Lawson boom.

Yet perhaps the most exact analogy is the one highlighted by Kevin Gardiner, head of global equity strategy at HSBC, of 1994. This too was a quite violent mid-cycle correction caused by a marked rise in interest rates. The parallels are indeed quite uncanny. Then, as now, the Federal Reserve was relentlessly raising interest rates after a period when, by the standards of the time, they had been held at exceptionally low levels to deal with the recession of the early 1990s.

Then, as now, there was a perceived build up of inflationary pressures in the system. Then, as now, many investors had been caught on the hop by a sharp reversal in bond yields. The magnitude of yesterday's fall in European markets suggest panic or forced selling. The risks of a major collapse among leveraged investors seems high given the present turmoil. The big scandal back in 1994 was Orange County, a local authority investor in California which took a bath playing the so-called convexity trade.

The thing to remember is that, if history is repeating itself, 1994 turned out not to be a harbinger of another global recession. Both equity and bond markets took a year or two to recover, but there was no economic downturn of any significance, nor in the fullness of time did the stock market setback seem more than a flea bite.

Even so, stock market corrections always have unlooked for consequences. One of the effects today is that the FRS 17 pension deficits we were used to reading so much about have once more reappeared after a glorious moment when a combination of rising interest rates and higher equity values had virtually wiped them out. Another consequence is that private equity will be dusting off a whole raft of all-cash takeover proposals that managements until two weeks ago had felt confident enough to treat with open contempt. Some may find it difficult to sustain this stance.

j.warner@independent.co.uk

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