Battle For The Bourse

The London Stock Exchange is as quintessentially British as cricket or the BBC. As far back as 1698, dealers met in Jonathan’s Coffee House in London’s teeming Change Alley to trade prices and shares. When the L.S.E. moved to a new, high-tech headquarters last year, Queen Elizabeth herself stopped by to dedicate it. But today the L.S.E, the battleground for many a corporate takeover, is itself about to be taken over — and neither of its two main suitors is British. Deutsche Börse, operator of the Frankfurt stock exchange, has proposed a $2.41 billion bid to buy the L.S.E. And Euronext — an upstart rival that runs the Paris, Amsterdam, Brussels and Lisbon bourses — is drawing up a counteroffer. Both parties met last week with L.S.E. chief Clara Furse, who is expected to make a decision with her board as early as this week.

The anticipated sale has ruffled feathers on both sides of the Channel. A similar bid by Deutsche Börse was rebuffed in 2000, in part out of national fear of handing the British institution over to foreign control. This time it’s reversed: German officials have expressed concern about the headquarters of the exchange moving to London, hurting Frankfurt’s status as a financial center — a concern shared by Deutsche Börse’s union, which fears job losses. But a spokesman for the Finance Ministry said the government supports the merger without restrictions.

Why so much fuss over who owns which stock exchange? After all, the days of crowded trading pits where dealers scream out prices are mostly gone. Now the deals are done on computer terminals in quiet back offices. No matter who buys the L.S.E., most investors and companies that trade there won’t notice a difference.

But the L.S.E. does have high symbolic value. As Europe’s largest stock exchange, its merger with a Continental bourse would accelerate the 21st century trend toward a more global market. Advocates say it would add depth and liquidity to Europe’s capital markets, and might help drive down transaction costs for investors. “This deal is good for the European capital markets, it’s good for our clients and their clients, and it’s good for the two companies,” Deutsche Börse CEO Werner Seifert told TIME.

Of course, that’s assuming Seifert’s bid prevails. He has been playing a hurry-up game, but Furse wants to slow down — and encourage a bidding war that drives up the price. “I’m expecting one,” says Olaf Kayser, an analyst at Landesbank Rheinland-Pfalz. “The loser will fall behind and be in a difficult position.” Deutsche Börse has offered $9.91 for each L.S.E. share, but that bid was spurned by the L.S.E. Analysts think the eventual price will be at least $11.20, which would drive the total price up to $2.78 billion.

But Euronext, which was founded in September 2000, is not about to give up without a fight. Euronext CEO Jean-François Théodore also met with Furse last week, and is said to have sweetened his deal by offering all cash. Some French analysts believe that despite its smaller size, Euronext might have a number of advantages over Deutsche Börse. Euronext already has 25% control of LCH Clearnet, a separate company that the L.S.E. uses to “clear” trades. Euronext in 2002 also bought liffe, a London-based futures and options market that lets investors bet on the future price of commodities like cocoa and coffee.

In an attempt to overcome this handicap, Seifert says that “sales” activities in British stocks as well as part of Deutsche Börse’s derivatives market, Eurex, would move to London, while the “factory” of back-office computers would stay in Frankfurt. A Deutsche Börse official told TIME the plan was to move 200 to 300 jobs to London out of total employment in Germany of 1,700. But these moves have drawn criticism. Hans Reckers, a member of the board of the Bundesbank, Germany’s central bank, says, “It’s not just the headquarters of the bourse but also important market segments [including Eurex] that must remain in Frankfurt.”

Assuming the takeover passes regulatory scrutiny, the winner will create a giant player. London currently ranks fourth behind the New York, NASDAQ and Tokyo exchanges in market capitalization and third in value of equity trading, but either deal would propel the merged exchange into second place worldwide, handling at least $6,162 billion a year in equity trading. “Of all the things at stake in this, the biggest is prestige,” says Pierre-Alexandre Pechmeze, an analyst at French broker Wargny.

If so much clout is on the line, why does the L.S.E. want to sell? Back in 2000, Seifert’s bid failed because some of the British brokers who then owned the market were against foreign ownership. Many feared, too, that analyst jobs would leave the City, London’s financial district — which 404 Not Found

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What’s changed? Partly, the money to be made; the 2000 deal was presented as a merger with no cash on the table. And partly the owners. The L.S.E. was “demutualized” in 2001, when its members (brokers and other institutions) floated it on the stock exchange. As much as 60% of its shares are now owned by big institutions — including hedge funds — that may be eager to take a profit.

The takeover bid also highlights the degree to which a stock exchange is really just a massive technology platform. Deutsche Börse’s technology controls all three steps in the share transaction: trading, clearing and settlement. (By contrast, the L.S.E. only controls the trade; clearing and settlement are handled by different companies.) “We have built up a huge infrastructure to connect the world,” Seifert says. Once you build that trading platform, it costs next to nothing to add onto it. Seifert’s dream is to combine the computer systems of both the L.S.E. and Deutsche Börse into a “next-generation system.” Some of his competitors see it as a monopolistic grab; A. Chris Tupker, chairman of settlement house Euroclear, has suggested that a purchase of the L.S.E. should trigger a “red alert” to antitrust regulators.

Ironically, such technology may someday eliminate altogether the need for bourses. The U.S., for example, has seen the explosion of electronic communications networks (ECNS), brokerless marketplaces that unite buyers and sellers electronically. Taking off in the late ’90s, ECNS now account for about 50% of all trades by volume on the NASDAQ exchange. Europe has not seen the same growth in stock ECNS, but they are widely used to sell government bonds in Italy and Germany.

For now, exchanges remain a vital part of Europe’s financial life. If a deal goes through — the L.S.E. could still refuse both suitors — it would mark the end of over 300 years of independent trading. But the power and dynamism of London as a financial center will not be affected; if anything its influence will grow.