Recriminations fly as Exchange calls off iX Frankfurt merger

An unsolicited bid by the Deutsche Börse for the London Stock Exchange looked increasingly likely last night after the LSE scrapped its much-criticised deal to merge with the Frankfurt exchange to create a new pan-European superbourse.

An unsolicited bid by the Deutsche Börse for the London Stock Exchange looked increasingly likely last night after the LSE scrapped its much-criticised deal to merge with the Frankfurt exchange to create a new pan-European superbourse.

The decision came just a day after OM Gruppen, the operator of the Swedish stock exchange, posted details of its £850m hostile bid to LSE shareholders, and was prompted by a sharp deterioration in relations between the London and Frankfurt exchanges. This, say exchange insiders, made it impossible for the LSE to proceed with the merger-of-equals plan in the face of what was increasingly seen in London as high-handed behaviour from the German camp.

Opponents of the iX deal welcomed the news, as did OM, which said it saw the announcement as a vindication of all it had been saying about the Anglo-German exchange merger plan. Apcims, the body that represents Britain's private client brokers, said the move was the "right decision".

A spokesman for Deutsche Börse said it "regretted" the decision.

Tension between the London and Frankfurt exchanges is understood to have come to a head at a LSE board meeting yesterday morning called in response to growing fears that Frankfurt was about to table a £1bn hostile bid for the LSE.

Members of the stock exchange board say privately that they were incensed by the threatening tone of a statement issued by the Frankfurt exchange after Monday's supervisory board meeting in Germany. "It was," said one, "the final straw."

Board members were also angered by the announcement that Werner Seifert, the controversial Deutsche Börse chief executive, would see his contract extended until 2006. This fuelled the worst fears among UK brokers about the standards of corporate governance Mr Seifert expected to see at iX.

Members were also irritated by the statement from the Deutsche Börse chairman, Rolf Breuer, that "as a result of the trading on an electronic platform, the physical presence on other markets, such as London, for example, no longer has any advantages to offer". The statement appeared to make a mockery of Dr Breuer's claim to be fully behind the iX deal.

Don Cruickshank, the LSE chairman, said the decision to halt the merger would allow the exchange to concentrate on fighting off the OM bid.

Tomorrow, he is likely to face a barrage of hostile questions from shareholders at the LSE's annual meeting. One leading opponent of the deal said the LSE board, five of whom are up for re-election, should pay the penalty for its support of the scuppered deal. The broker said: "At least one or two of the board should be made an example of."

Mr Cruickshank said last night: "When the OM offer has been seen off, the board in full consultation with shareholders and customers will review the means by which London's pre-eminent role in European equities trading can best be promoted." This statement will inevitably be seen as an invitation to other potential merger partners like Euronext, the tripartite exchange group of Paris, Amsterdam and Brussels, as well as Nasdaq to come forward with proposals.