After LIFFE, end is nigh for LSE

So farewell, then, London Stock Exchange. You were a good exchange for 240 years but you lost the plot. In a nutshell, your visionless management failed to adopt new technology and a credible strategy in a rapidly consolidating world. Now, as one investment banker recently jibed, “the hunter has become the hunted”.

The City concurred with that view following the LSE’s failed bid for the derivatives exchange Liffe, which fell into the arms of Paris-Brussels-Amsterdam axis Euronext. The LSE’s share price soared by 10 percent following the collapse of its takeover bid. Most humiliating was the fact that it lost despite offering £19 a share compared with Euronext’s £18.25. True, London’s terms were a mix of cash and shares while the Europeans tabled an all-cash offer, but as one market participant remarked: “It goes beyond the cash element. It’s really a matter of superior long-term strategy. The fact is the market had faith in Euronext as a more viable home for Liffe.”

The LSE could find itself in an awkward situation on purely technical grounds, since many companies listed in London will have their options traded on a competing exchange. That, however, is a minor concern. Alex Wilkinson, global head of listed products at Dresdner KleinwortWasserstein, says: “All products listed on Liffe are still cleared through the London Clearing House.”

A more serious issue for the LSE is preventing the centre of gravity shifting to Europe. In a purely electronic trading world the old arguments about City expertise, the English language, the time zone, the depth and liquidity of the market and so forth no longer hold water. The LSE is quick to point out that it is still home to 469 international companies from more than 60 countries, and that London has 149 pan-European stocks, some 50 percent of the total. It is also aware that the competition is closing fast. “We are always mindful that we’re operating in a competitive environment and have to compete strongly to retain and develop our position,” says an LSE spokesman. But that remark rings hollow.

“Management and decision-making are flawed,” says a UK fund manager. “As a portal for transaction business the LSE will have to fight hard to retain business. Clara Furse is a very credible chief executive officer but the senior management has her hamstrung.”

Recent history points to a deep-rooted management crisis that has all but stalled decision-making. The LSE lost three chief executives in rapid succession from the mid-1990s. The previous chief exec Gavin Casey walked out in disgrace after a botched attempt at a merger with Frankfurt’s Deutsche Borse, a deal that was bitterly opposed by all but the LSE’s big international investment bank members. Then came one of the most humiliating blows of all, when it found itself fighting off a hostile bid from small Swedish exchange OM Group.

Canadian-born Furse, who came on board last February, shrugs off the failed bid for Liffe and insists the exchange has not depleted its strategic options. “We are talking to a number of partners,” she says. “Alliances, joint ventures or fully fledged mergers are all possible.”

The leading suspects are Frankfurt and Nasdaq, while Tokyo and Hong Kong are cited as dark horses. The LSE says it is also looking at developing an integrated cash-derivatives platform with another exchange and adding equity products, or even contractual arrangements along the lines of the Johannesburg Stock Exchange. But Furse remains tight-lipped on potential partners.

Nasdaq looks the most plausible alternative and the US electronic stock market’s chairman Hardwick Simmons recently confirmed he could seek a merger with London, Frankfurt or Euronext by next year. A Nasdaq link-up would be a logical way forward for London, but Euronext has been brought closer to the US exchange by its recent takeover of Liffe, which has its own partnership with Nasdaq to trade single stock futures.

“Forecasting the LSE’s strategy is like trying to piece together a jigsaw puzzle while wearing a blindfold,” says Manus Costello, an analyst at Merrill Lynch. “We know what the pieces are but, with little clear direction from management, it is tough to see how they fit together.”

Another European investment bank analyst is more blunt: “There is probably not time for them to do a deal. They hint at another attempt to crank up a deal with the Germans, but in all likelihood it is Frankfurt that will go hostile, particularly if Nasdaq and Euronext merge.”