Jeremy Warner's Outlook: Is Macquarie prepared to pay the necessary as Aussies lowball the London Stock Exchange?

Make or break for trade liberalisation; New Stansted plans fail to quell opponents
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The Independent Online

The London Stock Exchange may have been a trifle over the top in the language it used yesterday in rejecting an indicative offer from Macquarie Bank, but its sentiments were essentially correct. After so many weeks of posturing, to come in with such a lowball offer is almost laughable. The Australian investment bank surely cannot be serious. Even as a softening-up exercise before a later, higher offer, this is too low to command a place at the negotiating table.

Macquarie makes the point that the suggested 580p a share is a 50 per cent premium to the price LSE was trading at before the current round of bid action started with an approach from Deutsche Börse. But this was nearly a year ago, and in the meantime the financials sector of the UK stock market has risen by the same order of magnitude.

The re-rating of shares among other quoted stock exchanges has been much more dramatic. Deutsche Börse is up 125 per cent and Euronext is 90 per cent higher. The New York Stock Exchange, newly merged with Archipelago, trades on a multiple of 60, with Nasdaq on something similar. Admittedly, other exchanges have more to them. Both Deutsche and Euronext are heavily into derivatives trading, clearing and settlement. The LSE, by contrast, is a pure cash equity market.

Yet London is also the place where international capital wants to be and in straight share trading at least, it is better placed than anyone else to attract an ever-widening pool of liquidity and listings. It is also one of the few exchanges that it is still possible to buy outright. As such, it has some of the attributes of a trophy asset. Macquarie is an outstandingly clever bank which generates sensational returns for its investors, but it does so by acquiring assets on the cheap. It wouldn't be bidding at all unless it expected to make a great deal of money out of the LSE.

Macquarie will have to do a lot better than this to get a foot in the door, and even then it needs to address public interest concern that the charges might be jacked up to pay off the debt in its bid. As for the view that the share price might collapse if Macquarie withdraws, this seems unlikely.

There is still the possibility of an alternative proposal, with genuine synergies to offer, from Euronext. And even if the owner of the Paris bourse opts for merger with Deutsche Börse instead, the LSE share price will remain underpinned by bid speculation in a fast-consolidating market for share trading platforms. The LSE has had nine bid approaches in five years. This is a level of interest which is not going to evaporate overnight. Let's hope Macquarie has deeper pockets than it pretends. Otherwise there is no point in the formal due diligence. It might as well pack its bags now and go back to Sydney.

Make or break for trade liberalisation

It is with a heavy heart that I take up my pen to write about the World Trade Organisation summit in Hong Kong next week. This has already been described by Joseph Stiglitz, the Ñobel Prize-winning economist turned Third World campaigner, as largely a waste of time, while even Peter Mandelson, the European Trade Commissioner, has rated the chances of progress as poor. The seemingly interminable nature of the trade liberalisation debate is like watching paint dry. There are surely better things to write about than the wholly predictable outcome of a week of multilateral trade talks.

So why do these talks matter and what are the chances of success? The underlying purpose of the so-called Doha round is to help the developing world by allowing open access to the markets of richer nations. Free trade ought in time also to encourage significant investment into the developing economies of the world, leading to greater prosperity all round.

Yet as always, every nation, or trading bloc, has its position. The Europeans are prepared to cut agricultural subsidies a bit but not by enough to satisfy the likes of Brazil. Likewise, there are certain forms of subsidy the Americans won't cede at all, and so on and so forth. There is myriad different negotiating positions and sticking points. It makes your head ache just to think about it all.

Trade liberalisation has been characterised by slow incremental progress punctuated by crushing setbacks and big leaps forward. A big leap forward seems extraordinarily unlikely on this occasion. The chances of the WTO achieving all, or even a large part, of its goals are about zero.

Ahead of the meeting, nobody appears willing to cede any ground at all. Mr Mandelson says he's already ceded all he can and there's no rope left to give. Even accepting this is just a negotiating ploy, there is already an unusual level of division and argument, and that's before ministers from around the world even begin to board their planes.

Yet it is probably better that the meeting breaks up inconclusively than in acrimony, as it has done in two out of the past three occasions. This is because the straightjacket of American politics mean that time is fast running out for the trade liberalisation agenda. America cannot negotiate at all without the "fast track negotiating authority" originally put in place by Bill Clinton. This runs out in July 2007, and there is absolutely no chance of a now fiercely protectionist Congress renewing it. Every trade deal would have to be approved directly by Congress. The US would arguably find it difficult to field a negotiating team at all. In any case, anything the US agreed couldn't be made binding.

In these circumstances, further incremental progress in multilateral trade liberalisation would become impossible. The WTO would collapse, and at best the present system would retread into a series of regional or bilateral trade agreements. In the absence of a mechanism for dispute resolution, protectionism might flourish anew, with dire consequences for international relations and economic prosperity. So though the Hong Kong summit may look like no more than a giant talking shop, the outcome is important and potentially earth shattering. No deal may be better than a bad deal, but the deadliest thing of all would be a Cancun-style walkout. This time it would be more than just a setback; it might be the end of multilateralism. Let the battle begin.

New Stansted plans fail to quell opponents

Plans announced yesterday by the British airports authority, BAA, to reduce the costs of a proposed second runway at Stansted to more manageable proportions, have done nothing to defuse opposition to the project. No one, other than the Government, wants this runway. Even BAA would rather build at Heathrow given the choice, while it's hard to figure out who among Stansted users and non-users object to it most.

Ryanair and other Stansted-based airlines think the project still too grandiose and fear being forced to part-finance the facility with higher landing charges. If there is to be more runway capacity at all, they figure, it should be built and run by someone other than BAA, which already has a near monopoly of capacity in the South-east. Opposition from non-Stansted users such as British Airways is just as vitriolic. If Stansted's airlines and passengers aren't going to be forced to stump up for the new runway, then who is? British Airways for one would be fiercely opposed to any change in the regulatory regime which make passengers at Heathrow and Gatwick liable for the costs. As for the environmentalists and local residents, they are still spitting tacks about the whole endeavour. For them, the new plan for a slightly shorter runway is neither here nor there.

If no one will pay for a second runway at Stansted, where would they be prepared to pay for one? It may be politically unpalatable, but the logic continues to dictate Heathrow, where there is a clear demand for more capacity and lots of airlines prepared to pay for it. The preferred option as it stands looks stuck in a commercial cul de sac, with lawyers the only likely beneficiaries of the battles to come.