Seifert under fire

FINANCE & ECONOMICS
Deutsche Börse

Feb 24th 2005
From The Economist print edition

How to alienate shareholders

FOR the second time, a bid by Deutsche Börse for the London Stock Exchange (LSE) is turning nasty. When Werner Seifert, chief executive of the German exchange group, first tried to buy its British rival, in 2000, his effort failed amid chauvinistic mud-slinging with the LSE's owners. This time Mr Seifert's own shareholders are trying to ruin his plan. On February 21st, the day Deutsche Börse reported its annual results, one of its biggest shareholders threatened to try to unseat its entire supervisory board.

TCI, a hedge fund that says it is Deutsche Börse's second-biggest shareholder, with a stake of 7.3%, wants the company's owners to vote on the proposed bid for the LSE. Yet under German corporate law Mr Seifert is not obliged to consult shareholders at all; a nod from the supervisory board will do. In Britain or the Netherlands, by contrast, a vote would be compulsory. So the fund is preparing a shareholders' rebellion. The plan is to find enough allies to bring down the supervisory board at the annual general meeting on May 25th. A simple majority would be enough.

To TCI and Atticus Capital, another big shareholder, the proposed takeover does not make commercial sense. They think that Mr Seifert is offering too high a price for the LSE—£1.35 billion ($2.4 billion)—and that his estimates of the likely cost savings are far too high. Moreover, they say, Rolf Breuer, head of the exchange's supervisory board, is biased. Mr Breuer is also boss of the supervisory board of Deutsche Bank, which owns 6.8% of the LSE. “This is an empire-building exercise,” says Christopher Hohn of TCI.

The funds think they could speed up the slow-moving reform of German corporate governance and strengthen shareholders' rights if they succeed in May. As for Mr Seifert, he shows no sign of trying to pacify his critics. During the discussion of Deutsche Börse's annual results on February 22nd, he did not even allow shareholders to put questions to him by telephone. Three months ago a couple of hedge funds annoyed him with their questions during a similar conference call.

Deutsche Börse argues that TCI and its allies are merely pretending to campaign for reform of German corporate governance when in fact they are interested in making a quick buck. The funds want Deutsche Börse to buy back shares and return money to shareholders. That is not a long-term strategy, says the company. In its view, stock exchanges must try to grow as much as possible, because the fixed costs of running a stock exchange are high but variable costs are low.

Should TCI and its allies unseat, or at least unsettle, Deutsche Börse's top brass, that would cheer Euronext, an operator of several European exchanges. This month Euronext put its own case for bringing the LSE into its fold. It promised greater savings than Deutsche Börse, but did not name a price. In a similar battle (with the LSE) for the London International Financial Futures and Options Exchange in 2001, Euronext also kept quieter than the competition—and was the surprise winner.

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