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FINANCE & ECONOMICS

Euronext and the LSE

Feb 10th 2005
From The Economist print edition

An approach to the London Stock Exchange is missing one detail

AT LAST, the London Stock Exchange (LSE) has the competing proposals for its hand in writing. On February 9th Euronext, operator of several continental exchanges, published details of its case for bringing the LSE into its fold. Euronext promised that trading would get cheaper and said that a takeover would yield €203m ($260m) annually, through lower costs and higher revenue. However, unlike Frankfurt-based Deutsche Börse, which opened the battle for the LSE, Euronext put forward no price tag. Deutsche Börse's £1.35 billion ($2.4 billion) offer, made in December and repeated late last month, was roundly rejected.

The LSE's board made no comment on the new proposal, citing (understandably) the absence of a price. That detail aside, in many respects Euronext's intentions look similar to Deutsche Börse's. Both say that the LSE's customers will enjoy a 10% cut in trading costs. Neither Jean-François Théodore, boss of Euronext, nor Werner Seifert of Deutsche Börse seems willing to move the headquarters of a combined exchange to London. But both brim with assurances that regulation of the LSE will be unchanged, since Britain's Financial Services Authority (FSA) is doing such a fine job. Euronext, which sees itself being dually listed in London and Paris, says it would adopt a single-tier board for the combined exchange; Deutsche Börse is bound to a two-tier model by German law.

The bids differ strikingly, however, in their calculations of the benefits of a merger: €203m a year before tax, says Euronext; a mere €100m, reckon the Germans. But they are banking on the same sorts of improvements: cost savings from merging trading systems, better distribution networks and so on. Quite why Euronext should be able to promise so much more is hard to see—although it will be able to capitalise on its foothold in London, having bought Liffe, the London derivatives market, three years ago. Euronext puts restructuring costs at €184m, nearly twice Deutsche Börse's estimate.

Ultimately the battle may turn not just on numbers, but on corporate governance and regulation. Last week the FSA warned that while it was “indifferent to the nationality” of a combined exchange, long-term regulatory arrangements deserved more thought. Even if the LSE stays under the watch of the FSA for some years after being bought, future electronic improvements could mean that LSE traders end up sending orders to a market elsewhere, under another regulator. Moving a combined exchange's headquarters to London would assuage such concerns.

If Deutsche Börse's experience is any guide, Euronext may encounter some skittishness from shareholders, who will want to know how much they would pay for the LSE. At least one Deutsche Börse shareholder is demanding a meeting to vote on whether a takeover bid is even sensible. Euronext is required by Dutch law to hold such a meeting. Though listed in Paris, it is registered in Amsterdam.

As talks continue all round, the LSE is meanwhile doing nicely on its own. The same day as receiving Euronext's proposal, the London exchange announced that January 2005 had been its busiest month ever, with trading on its main platform up by 17% from a year earlier. That will make its two admirers even keener.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.