LSE prepares to make £400m bid as Liffe puts itself up for auction

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The London International Financial Futures and Options Exchange put itself up for auction yesterday when it revealed it had received several takeover approaches, and forced the London Stock Exchange to admit it was among the interested parties. The LSE is thought to be preparing a half cash, half shares offer.

The newsfollows months of speculation since Clara Furse, a former deputy chairman of Liffe, became LSE chief executive in February. Her formal approach came in a telephone call last week to Hugh Freedberg, her opposite number at Liffe.

Liffe shares, traded by Cazenove, rose from 860p to as high as 1,300p yesterday, valuing it at £350m. Shares in LSE closed up 30.75p at 338p, valuing it at £1bn. The LSE has £150m of cash and recently arranged a £250m loan facility. Analysts said it could pay up to 1,500p a share, or £400m. "Liffe is saying: if there's a deal to be done, let's do it on our terms," one source said.

Liffe would not elaborate on the other "approaches", though the likely contenders include Nasdaq, Deutsche Börse and the Chicago Mercantile Exchange. Euronext, formed last year from the merger of the Paris, Brussels and Amsterdam stock exchanges, was also tipped as a bidder. All declined to comment. ICAP, the interdealer broker that owns a 5 per cent stake, said it would not launch an offer.

Mr Freedberg said: "In the past fortnight we've seen approaches from companies seriously considering whether they can buy or merge with Liffe. [These] are very high-quality, large-scale organisations. Somebody will find a way of making it happen." He saidBrian Williamson, Liffe's chairman, and he had discussed their job prospects within a merged organisation, but there were no talks with the LSE about the future roles of Ms Furse and the chairman Don Cruickshank. "I don't know Don Cruickshank, but Clara Furse was great while she was at Liffe, and has been great for the LSE," Mr Freedberg added.

A tie-up of Euronext and Liffe could threaten Nasdaq's plansto dominate the pan-European shares and derivatives markets. The US exchange yesterday moved to warn potential bidders that its existing joint venture with Liffe would not be easily unravelled. Bob Fitzsimmons, president of Nasdaq Liffe Markets, said with Liffe's backing: "Liffe's position to all companies or organisations that have formally approached them is that they must fully understand Liffe's commitments to ... the joint venture with Nasdaq."

Representatives from shareholders accounting for more than 50 per cent of Liffe's shares sit on the company's board. Battery Ventures and Blackstone Ventures, the US venture capital groups with control of more than 40 per cent of Liffe, are understood to be comfortable with a deal involving shares and cash.

Analysts said a combination of Liffe and the Deutsche Börse would run foul of competition authorities. Last year, the LSE conducted failed merger talks with Deutsche Börse, and escaped a subsequent hostile bid from OM, the owner of the Stockholm stock exchange. Brian Winterflood, the chairman of Winterflood Securities and an active LSE shareholder, applauded the exchange's move.

The LSE could cut costs by combining head offices and back office functions. It would also see smoother earnings since derivatives trading habitually surges when equity volumes weaken.