Michael Harrison's Outlook: Phoney LSE war comes a step closer to battle

If there are any fans of Groundhog Day in the City they must have experienced that familiar sense of déjà vu yesterday morning as the terms of Deutsche Börse's "proposed pre-conditional cash offer" for the London Stock Exchange trickled on to dealing screens. As the wording indicates, it was not a bid at all, much less anything the Germans could be held to by the Takeover Panel, but rather a statement of intent.

The price remains the same at 530p a share, nor has the structure of the offer altered from that already spelt out to the LSE before Christmas and again last week. But at least the Börse boss Werner Seifert has set down his thinking in black and white for the first time. In this sense it was an announcement aimed not so much at shareholders in the target company but those in the would-be acquirer, some of whom think there might be better ways for Mr Seifert to spend £1.3bn. For them, he has promised cost savings of at least €100m a year, although this is undoubtedly a conservative estimate.

For Stock Exchange customers in London who fear that a German takeover will mean higher charges there is the promise of a price cut followed by a five-year freeze. For those who fear they will be forced to migrate to Deutsche Börse's settlement and clearing systems, there is the promise to retain a separate LSE board containing a "significant" proportion of customers and led by an independent chairman.

To dispel the terrible myth that the Börse is in some way Mr Seifert's personal fiefdom run for his own convenience, seven of the great and the good from the Square Mile will be invited to sit on its supervisory board.

So much, so predictable. We will not see the real colour of Mr Seifert's money, or test how watertight his promises are, until the rival bidder, the pan-European exchange Euronext, puts its proposals in writing. Now that Euronext has pre-notified the Office of Fair Trading of its interest in making an offer, that day is perhaps not too far away.

Both bids are attempts at empire building dressed up as cost-cutting exercises in consolidation. For LSE shareholders it will still come down largely to which one can save more and therefore afford to pay the most. For the regulators, it will be a matter of what is more palatable - the vertical integration which Deutsche Börse proposes or the horizontal integration that lies behind Euronext's model.

Mr Seifert is so confident of his case that the sole condition of his proposed offer is that the LSE board recommends it. But there can be little doubt that he will have to rehearse his arguments before the competition authorities in London or, more likely, Brussels. Groundhog Day all over again, you might say.

Surely not, Shell

The devil makes work for idle dealers and one of the more fiendish rumours to have been circulating in the markets of late is that Royal Dutch/Shell and Total of France are contemplating a giant oil merger. The idea was first floated in a research note from Exane BNP Paribas last autumn and it surfaced again a week ago.

It sounds far-fetched and it probably is. But then who would have thought five years ago that BP would be the size it is today thanks to two daring and exquisitely timed takeovers which have transformed it into Britain's most valuable company?

A combination of Total and Shell would be in a different league again, creating a business worth £180bn and unseating Exxon-Mobil as the world's biggest oil company. BNP calculated that there would be a further 20 per cent upside for Shell and Total shareholders on top of that.

Total is no stranger to corporate action itself, having picked off PetraFina and Elf Aquitaine in quick succession as the oil industry underwent its last big consolidation phase. The BNP boys reckon, however, that any deal with Shell would have to be structured as a takeover of Total, and, alas, that's really where the problems begin. BP struck when the oil price was at an historic low and swept up Amoco and Atlantic Richfield for a song. It cannot have escaped BNP's notice that the oil price today is gushing towards $50 a barrel, which would make Total a very expensive prize to digest for anyone.

Then there is the small matter of the disposals Total and Shell would have to volunteer to keep the regulators onside. Two-thirds of Total's business is tied up in downstream operations such as petrol stations. There would need to be a firesale of its forecourts to make any deal palatable to the competition authorities.

Finally, and not least, how on earth would an Englishman, a Dutchman and a Frenchman get on together under one roof? Language might not be a problem but culture certainly would. Shell is braced for seismic change enough as it gets ready to ditch 100 years of tradition along with its dual board and twin-listing and embrace the Anglo-Saxon model. Could it really handle an infusion of Gallic blood so soon after? Not to mention the baggage of past corruption scandals that Total brings?

It surely couldn't happen but if it did, the French President Jacques Chirac would welcome it for one. Indeed, when he spoke of Europe creating a new breed of industrial champions a fortnight ago in Toulouse, energy was high on his wish-list. A co-incidence? Probably, but don't underestimate French ambition.

AstraZeneca battle

John Patterson, appointed to the board of troubled AstraZeneca a month back to conduct a shake-up of its drug development organisation, fluffed his first lines to the City yesterday.

Our task, he said, is to turn medicines into molecules. He meant it the other way round, of course, but the slip was a reminder about how tough it will be to stop AstraZeneca going backwards over the next few years.

The failure of several high-profile new drugs means AstraZeneca can immediately pocket the money it would otherwise have spent on marketing launches. But in the medium term, there is a worrying gap in the pipeline and earnings could go into reverse in the last years of the decade.

The battle to prevent this happening happens to co-incide with the battle for the succession to Sir Tom McKillop. The chief executive is likely to go within the year and is already said to be eyeing the Royal Bank of Scotland chairmanship.

Dr Patterson's honesty about the risks of failure by some of the company's experimental new drugs was a refreshing change from Sir Tom's perennial and often damaging over-optimism. It suggests Dr Patterson will be willing to cut the programmes early if necessary, but replacing them is no easy task, and just finding new uses for existing drugs won't be enough.

So cost savings move to the fore. Jon Symonds, the finance director, also flanked Sir Tom yesterday and set out a string of areas where nips and tucks could save millions. Clinical trials can be moved off-shore. Manufacturing can be rationalised. Sales forces must find more effective ways of communicating with doctors.

It may not have the fireworks of Milburn versus Brown, but as Mr Symonds and Dr Patterson move centre-stage this year, the new chairman, Louis Schweitzer, will have ample chance to decide if either is up to the top job, or whether he must look outside the company.

m.harrison@independent.co.uk

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