Deutsche Börse pulls out of £1.3bn London Stock Exchange bid

In a surprise move last night, Deutsche Börse withdrew its £1.3bn offer for the London Stock Exchange, bowing to a growing shareholder revolt and clearing the way for its European competitor Euronext.

In a surprise move last night, Deutsche Börse withdrew its £1.3bn offer for the London Stock Exchange, bowing to a growing shareholder revolt and clearing the way for its European competitor Euronext.

The German exchange operator said it took the decision after failing to win a recommendation from the LSE's management for the offer and following consultations with its own shareholders, many of which opposed the bid.

Last week, Werner Seifert, chief executive of the Frankfurt-based exchange, failed to secure conciliatory meetings with the rebel shareholders who thought the bid would affect the value of their investment.

Mr Seifert said last night: "We continue to believe that shareholders, issuers, investors and intermediaries would all benefit from consolidation of the European exchange landscape as contemplated in our proposal. However, the LSE does not find itself in a position to recommend a transaction at a price we find supportable."

An insider said that the development raised questions over the future of Mr Seifert and would also create problems for Clara Furse, the head of the LSE. "This is a pretty incredible development. It will raise questions over how long Werner Seifert is going to last, and it puts Clara [Furse] in a difficult position," the source said.

The withdrawal of the bid spells an end to Mr Seifert's ambition to take over the LSE, Europe's biggest stock exchange by trading volume. In 2000, his attempt to merge with the LSE was scuppered by opposition from London users. It also ends Ms Furse's hopes of engineering an auction to raise the bid price over 600p a share. The LSE had twice rejected Deutsche Börse's 530p a share bid. There will be speculation that Ms Furse might try to keep the London exchange independent.

Euronext, which operates exchanges in Paris, Amsterdam, Brussels and Lisbon, declined to comment last night. Its investors, some of whom also hold stakes in Deutsche Börse, are also concerned that Euronext does not overpay for the London market.

Euronext has not faced the same amount of investor opposition as Deutsche Börse, partly because it has to put any bid to shareholders and because it has returned more cash to investors through share buy-backs.

Deutsche Börse said it would now work with shareholders on a plan to make "a significant distribution of funds" to them in addition to the dividend payout for 2004. It had come under increasing pressure from dissident investors, estimated to hold about 38 per cent of its shares, who feared it would overpay for the LSE and demanded that Frankfurt return its growing cash pile to shareholders instead.

The shareholders' revolt has been led by the hedge funds TCI and Atticus Capital and also included Fidelity Investments and Merrill Lynch. TCI claimed Deutsche Börse was ignoring shareholders' opposition to the LSE bid, and Atticus accused Mr Seifert of "empire Building".

Under German law, Deutsche Börse's bid did not have to be put to shareholders for approval, so the rebels threatened a vote
to oust its supervisory board at its annual meeting on 25 May.

Mr Seifert said he believed that the proposed transaction would have created value for Deutsche Börse shareholders but acknowledged that a "significant portion of our shareholder base is focused on return of capital in the short term".

Frankfurt could return some of its DM700m (£480m) cash pile to investors through a share buy-back or a special dividend to placate them.

Deutsche Börse said it reserved the right to submit a new offer for the LSE if Euronext or another third party announced an offer for the London market.

Euronext has been holding discussions with the LSE but has not yet put a price on the table. Both suitors had notified the UK's Office of Fair Trading of their interest in the LSE, and Euronext has been keen to obtain clearance from the competition authorities before making a bid. Deutsche Börse's "vertical silo" structure has been widely criticised by users of the LSE and others, as it combines trading platforms with clearing and settlement operations, giving it extra pricing power.

Deutsche Börse's withdrawal from the takeover battle came as a shock, particularly
as its talks with the LSE were thought to be progressing well, and also after the LSE threw open its books to both suitors last week in an attempt to get an auction kick-started.