INSIGHT - EuroBorse AG or EuroBorse PLC?

When is a merger a takeover? Answer: almost always. But sometimes the acquiror is not so easily identifiable, like in the coming together of Lloyds Bank and TSB Group, in which the former paid nearly £2bn for the latter, although it is TSB that has staffed the top echelons of the new bank with its own people. Most recently, the “alliance” between the London Stock Exchange (LSE) and Frankfurt’s Deutsche Borse looks not unlike the Lloyds-TSB merger: it’s an open question whether this is a partnership, as the two exchanges claim, or a crypto-takeover. And if it is a takeover, who’s doing the acquiring? In early July the two markets formally agreed to open their computerised dealing systems to one another’s members from next January, coinciding with the launch of the euro. This common access package will combine liquidity of the top 300 European blue-chips traded in both cities. The second and more ambitious phase will entail the introduction of a single electronic trading platform. This will be no easy task: ironically both markets’ platforms – Sets and Xetra – were designed by Andersen Consulting but are not considered compatible. Hence the likelihood that the fully operational pan-European stockmarket proposed by London and Frankfurt will be delayed until 2005 at the earliest. Nevertheless, the proposal has earned kudos from most quarters. “A common Europe-wide trading platform for cash equities seems inevitable,” says Mark Howdle, European equity strategist at Salomon Smith Barney. “When it arrives, the merged stockmarket will bring important benefits for investors. Lower transaction costs, deeper liquidity and lower settlement risk all add up to greater market efficiency. It makes Europe a more attractive place for international investors to put their money. It’s good news.” There is a temptation to speculate that this was a devilishly clever move on the part of London to preempt Frankfurt putting together its own Euroland alliance, leaving the LSE out in the cold and furthering Germany’s ambition to become the financial leader of the new Europe. London must have been aware that Frankfurt was also talking to Nasdaq, which has been making an aggressive pitch to lure European companies to list in the US. But as one market participant sadly remarked, “London doesn’t design clever situations, it bumbles its way into them.” By almost any measure, London should be the senior partner of the alliance. It ranks second behind the US, with a market value of £1.25 trillion, while Frankfurt lags in fourth place after Tokyo with £502bn. More than half the world’s cross-border share dealings take place through London and since 1993 London’s foreign share business has exceeded domestic dealings, with £722bn of Seaq International trades last year compared with £524bn of UK share transactions. London has the expertise and it has become headquarters for most international investment banks’ capital markets operations, including those of the leading German banks. US and Japanese investors feel comfortable in London. It’s the English language, the time zone, the Anglo-Saxon legal system, the quality of life – ask any banker or fund manager whether he would prefer to relocate himself and a family to London or Frankfurt. So whether by accident or design, the LSE-Frankfurt alliance has effectively helped secure London’s future as the financial capital of Europe. London and Frankfurt are by far the largest stockmarkets within the EU, but there are 37 exchanges in Europe and two bourses do not make a pan-European market, a fact that has not escaped the attention of the LSE’s chief executive Gavin Casey. “In order for this to be a truly pan-European market we want to involve other exchanges and we look forward to similar discussions with them,” he says. Indeed, the London-Frankfurt deal could become a trend-setter, with the Chicago Board Options Exchange merging with the San Francisco-based Pacific Exchange, a back office link-up between the Chicago Board of Trade and the Chicago Mercantile Exchange, and the New York Stock Exchange itself saying it is in talks with potential partners. The initial reaction from France, Europe’s third bourse, was predictable enough. “This is a very speculative move in the cash market,” says Jean-Francois Theodore, president of the Societe Bourse Francais (SBF). “It is the spark that will ignite the dynamite which was already there.” Chilling words from an official who, one is tempted to speculate, is less than happy having not been invited to the party. Luring France into the grand alliance will require some tactful diplomacy, meanwhile the rest of Europe is waxing cautious over the London-Frankfurt axis. “We have the liquidity in big Dutch stocks and it won’t disappear all at once,” says Amsterdam. “It is a very interesting but very complex and long-term project,” says Madrid. Milan sees it as “limiting the options for Italy” and believes that the ball in now in Paris’s court. All of which suggests that Theodore may not have been far off the mark when he predicted that Europe would consolidate into three or four networks located in London, Frankfurt, Stockholm and Paris. “Most assuredly, Paris will be there,” he says. According to the LSE’s Martin Wheatley, senior manager for market development, preliminary talks have already been held with several European bourses. “They are interested in the idea and say they need more information,” he says. The London-Frankfurt joint venture company will be incorporated within the next six to nine months as a 50:50 partnership. However, the company’s geographical location and local jurisdiction will, to a large, extent determine who is perceived to be the dominant partner. On this, the LSE has little light to shed. “This is not relevant,” says the LSE’s Wheatley. “We are trying to create a pan-European market in which each partner brings different things to the party. The issue of where it is to be incorporated has not yet been decided.”