Crisis that goes to the heart of the City

Britain's great financial institutions have been steadily falling into foreign hands. Now it's the turn of the Stock Exchange itself <i>BY JASON NISSE</i>
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The Independent Online

he London Stock Exchange is in a mess. Its attempts to bully the City into approving a merger with the Frankfurt Börse have blown up in its face. First the little guys - the backwoods brokers who trade a few stocks for Aunty Marge in Bognor Regis - objected. Then the bigger players started raising the alarm until it became apparent that the vote on the deal was likely to be lost. The Swedes - who, historically, make up such an insignificant market, it's like Gillingham squaring up to Manchester United - were audacious enough to make a hostile £800m bid for the London Stock Exchange. Then, the whole deal fell apart.

he London Stock Exchange is in a mess. Its attempts to bully the City into approving a merger with the Frankfurt Börse have blown up in its face. First the little guys - the backwoods brokers who trade a few stocks for Aunty Marge in Bognor Regis - objected. Then the bigger players started raising the alarm until it became apparent that the vote on the deal was likely to be lost. The Swedes - who, historically, make up such an insignificant market, it's like Gillingham squaring up to Manchester United - were audacious enough to make a hostile £800m bid for the London Stock Exchange. Then, the whole deal fell apart.

Now the wisdom in the Square Mile is that the stock exchange might be taken over by the Swedes, or the Germans, or even the Americans. What is virtually certain is that it will not remain British.

So, how did we end up in such a pickle?

To understand you need to go back 14 years, to the Big Bang. That was when the central market, where shares in all British companies are traded, from Marks & Spencer to Blooms of Bressingham, stopped being a private members' club. It was forced to face up to the realities of international capitalism. Until then the London Stock Exchange had been a cartel, controlled by a series of partnerships with arcane names such as Scrimgeour Kemp Gee, de Zoete & Bevan, and Savory Milln.

Faced with the threat of legal action by the Government for restricting competition, the stock exchange struck a deal. It would allow outsiders to join the market, and it would reform its bizarre practices - which included the government broker always wearing a top hat, and certain traders not being allowed to speak to certain brokers - which had existed since the 18th century.

The exchange, and the City grandees, thought they could control the reforms. They were wrong. They opened Pandora's box. Within months, US, Swiss, French, German and Japanese banks were all strolling into the market and taking over venerable British firms. Hoare Govett, SG Warburg, Hambros, Barings, BZW, Kleinwort Benson and Schroders, were just some of the names taken over. Only Cazenove, NM Rothschild and Lazard Brothers among the big names are still British - and Lazards only partly so.

Wealthy stockbrokers swapped their Surrey semis for villas in Cap Ferrat, and the structure of the market altered entirely. The biggest players are now Merrill Lynch, Goldman Sachs, Schroders Salomon Smith Barney, and Morgan Stanley (American), Deutsche Bank (German), UBS (Swiss), and CSFB (part Swiss, part US).

These global investment banks are run on aggressively capitalist grounds. They are strict financial meritocracies. If you make money you are paid handsomely, with million dollar bonuses in a moderate year; if you don't make money you're out, your possessions dumpedin a black bin liner with your P45.

Yet the stock exchange appears not to have adapted. It has staggered from disaster to disaster - none more so than the £275m computer cock-up in 1993 when the exchange had to junk its paperless back-office system, Taurus.

By its own admission its computer systems for share trading are not up to snuff. The merger with Frankfurt is based upon using German technology. But brokers who each pay fees of millions of pounds a year for what they feel should be a BMW-level service, make do with a clapped-out "Rover".

The catalyst for the final showdown came in April. Don Cruickshank, Richard Branson's former "lieutenant" and telecoms regulator who combines the chairmanship of the exchange with being Gordon Brown's hammer of the high street banks, announced that the London Stock Exchange was to strike a 50/50 merger with Frankfurt. In the grand traditions of London Stock Exchange cock-ups, even this announcement was mishandled: someone faxed to the press a briefing Cruickshank would give if the talks with Frankfurt failed - it blamed "German intransigence and greed".

The merger was the brainchild of Cruickshank, Gavin Casey, the London exchange's rather low-profile chief executive, and their opposite numbers in Frankfurt, Rolf Breuer and Werner Siefert. The deal coincided with a shake-up which magically produced a windfall of up to £1bn for the brokers voting on the merger.

Nevertheless, opponents quickly emerged, pointing out the conflicts of interest. Casey had previously worked for Merrill Lynch, the US bank that is not only one of the largest traders on both exchanges, with one of the London exchange's leading directors, Michael Marks, but which was paid a fee to arrange the deal.

Breuer chairs Deutsche Bank, also one of the largest traders on both markets. The Frankfurt Börse was advised by Goldman Sachs, a massive trader on both markets as well as being adviser to Frankfurt and providing the London Stock Exchange with the high-profile director Simon Robertson.

As if that were not enough, it emerged that Cruickshank and Siefert had worked together, at the management consultants McKinsey. The words "stitch" and "up" were used.

Over the past 20 weeks, the exchanges merger has been the most popular topic of conversation at City lunch tables. Moans about lack of information, questionable technology and pressure to vote yes have been mixed with a certain dislike for Siefert. One City grandee said: "The exchange has been hoodwinked, let me tell you. If Herr Siefert invited you to a party, you'd end up paying for the drinks."

However, the general feeling is one of helplessness. The City had already sold its soul to foreigners, so ultimately decisions about what would happen to the exchange was down to them. Cruickshank gave the cold shoulder to attempts by the former Tory MP, Angela Knight, who runs the association representing small brokers, to have the vote on the merger delayed to allow for more discussions.

It took the Swedes to break up the party. OM Gruppen, a company which grew from a market so small it was once cornered by Lord Archer's son, James, stuck £800m on the table and the exchange's defences crumbled.

Realising that if they forced the issue, they would be defeated, Cruickshank and co retreated to lick their wounds and come up with a fresh plan.

What will happen? The Swedes are unlikely to succeed. Though they have put a lot of work into their bid, being such a minor player their attempts at the London summit seem doomed. The Germans are marshalling their resources for a fresh bid, enlisting help from both the Milan and Madrid exchanges. Frankfurt has more fire power, but it knows that the prize could now be beyond it.

Lurking in the wings is Nasdaq, the giant US exchange which is keen to start making a bridgehead in Europe. Significantly its chairman, Frank Zarb, met Siefert and Cruickshank for dinner on Wednesday. Up till now Nasdaq has been supportive of the Frankfurt/ London merger, but Zarb is emitting enigmatic comments about not only dancing with the girl he brought to the Proms.

When the music stops, will the Yanks be the ones that take the London Stock Exchange home with them?

BUSINESS SECTION, PAGE ONE

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