Jeremy Warner's Outlook: Seifert's LSE waiting game draws to a close

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The Independent Online

There will be nobody working at the London Stock Exchange's offices this weekend other than the cleaners, we were firmly assured last Friday against a backdrop of mounting speculation of an imminent bid from Frankfurt's Deutsche Börse. In the event there was a full scale board meeting, backed by a platoon of investment banking and legal advisers. Either the LSE was the last to know about Werner Seifert's planned 530p a share bid or it was being deliberately disingenuous.

For Deutsche Börse's ebullient chief executive, this is a second bite at the LSE cherry. Last time around he was driven off by a faintly distasteful display of xenophobia among the Stock Exchange membership in combination with some well founded concern over proposals for joint trading and regulation of the two markets. A genuine merger was planned and by the standards of the time it may have been overly ambitious.

Much has changed since then. Both markets have demutualised and floated, with the result that smaller users don't hold the same sway as they used to. Mr Seifert has also learned from past mistakes. There will be no attempt to harmonise the listing requirements or to merge the two trading platforms.

Instead, Frankfurt and London will remain as separate entities, locally regulated and run. Deutsche is also promising a reduction in tariffs to something closer to its own. Even so, Mr Seifert is unlikely to get away entirely free of last time's anti-German backlash. Despite the stock market flotation, users still own about 25 per cent of the company, which is quite enough to create a fuss.

What's more, the deal last time around was arguably better. Owners were then being offered half the combined business. Today's bid is less than one-third of Deutsche's enterprise value, and it's all cash, which means there's no share in the upside. Last time around, the combined platform was to have been run from London, so theoretically at least London would have gained Germany's entire equity trading market. This time Mr Seifert will remain firmly glued to Frankfurt.

It is hardly surprising, then, that the LSE board is exercising caution. Directors were made to look prize chumps four years ago when they recommended the Deutsche merger only to have members angrily give it the thumbs down in a vote that forced the resignation of the luckless Gavin Casey as chief executive.

Deutsche's opening shot is in truth not a bad price, yet there is a reasonable chance of an auction developing with Frankfurt's big Continental rival, Euronext. The possibility of regulatory interference cannot be entirely discounted either. Deutsche Börse has the greater firepower, but Euronext, which through Liffe already has a substantial London presence, has the better opportunity for synergies and cost savings.

The prospect of a Franco-German tussle for the LSE will throw the City's still not inconsiderable constituent of little Englanders into a spluttering frenzy of protest, yet the truth is that LSE members surrendered all right to special protections when they demutualised and largely sold up. Michael Spencer, chief executive of Icap and one of the most vociferous opponents of the Frankfurt merger last time around, has long since disposed of any remaining interest in the LSE, more fool him.

In any case, the LSE largely has itself to blame for becoming the acquired rather than the acquirer. The London exchange had the chance to build a robust independent future, but blew it when it tried and failed to buy Liffe. This would have made it impossible for Deutsche, which owns Europe's only other substantial futures exchange, to bid and it would almost certainly have put Euronext out of contention too.

The LSE has always presented this failure as a question of price. Yet in truth it was just a mistake. As it turns out, Euronext cannot be said to have overpaid for Liffe. On the contrary, it seems to have got a bargain. Nor actually was price the primary obstacle. In fact it was Stock Exchange arrogance and, in particular, its belief in the superiority of its own IT, which in practice would have been wholly inappropriate for a market as complicated as Liffe. Between them, Don Cruickshank, then chairman of the LSE, and Clara Furse, the chief executive, managed to botch the negotiation, prompting Liffe's Sir Brian Williamson to sell the company to Euronext instead.

That's all water under the bridge now, but for those of us who despite ourselves still do feel a frisson of irritation at the idea of this once great City institution slipping under foreign control, it's reasonable to reflect on what might have been. Like so much of the "old" City, the LSE has found itself outmanoeuvred by more aggressive, better capitalised, foreign rivals.

As the jazz loving Mr Seifert points out, we live in a globalised economy now where even a company as quintessentially Germany as Deutsche Börse is majority controlled by UK and US institutions. The business will simply go elsewhere if he serves the LSE's customers poorly. The fact that Britain's main platform for trading equities is controlled from Frankfurt is unlikely to affect the economic health of the City or the nation very much, if at all.

It's an ill wind, none the less. There was a lot of talk in the City yesterday of the "winner's curse", the idea that in an auction between Deutsche and Euronext the victor will end up overpaying and regretting it. I doubt that. The LSE remains a great business franchise. It is only a shame that more couldn't have been made out of it as an independently quoted British company.

Novar/Honeywell

The £810,000 bonus that Novar's new chief executive Stephen Howard stands to make from the Honeywell takeover is not bad going for just five weeks' work. Say it in dollars, the currency in which Honeywell is paying, and it sounds even better.

Novar would like us to think that the bonus is justified on the grounds that Honeywell is paying £300m more for the company than it was worth when Mr Howard took the reins on 4 November. In fact, the company's shareholders, and its chief executive, owe their good fortune almost entirely to the rival bidder Melrose, without whom Honeywell would never have been flushed out this quickly, if at all.

Led by an asset stripper who cut his teeth under James Hanson and another who built up the mini-conglomerate Wassall, Melrose was the kind of corporate raider that no quoted company likes to see coming round the corner. In fact, the irony of the situation is that whereas Melrose says it would have kept Novar largely intact, it is the white knight in the shape of Honeywell which plans to break the business into pieces and sell off everything apart from intelligent building systems (that's fire alarms and CCTV to the rest of us). Honeywell reckons it can squeeze an extra $100m a year of profit out of what will be left of Novar once its aluminium extrusions and cheque printing businesses have been got rid off.

Melrose's bid was essentially a management buy-in. Honeywell's is the asset stripping exercise.

For Melrose, a bid vehicle which was put together by a handful of big institutions, most of them with shareholdings in Novar, there are some lessons to be learnt. One is that its capital structure may have to be altered. So small was the equity value of the company that it could not buy Novar shares in the market to cover its own bid costs in the event that it was outgunned by a higher offer.

As for Mr Howard, an American by birth, his bonus has come just in time to enjoy a Christmas shopping spree in New York, where the buying power of the British pound has rarely been stronger. Melrose, by contrast, gets nothing at all for its trouble. It seems that fortune doesn't always favour the brave.

jeremy.warner@independent.co.uk

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