Bid for LSE Shakes European Exchanges

They have been derided as Nordic upstarts and celebrated as the business equivalent of the musical group Abba, storming their way onto the London stage. Either way, OM Group of Sweden has succeeded in shaking up the European financial world with its hostile bid to take over the London Stock Exchange.

Stock market analysts are calling the surprise $1.2-billion tender offer a watershed. It not only threatens to torpedo LSE’s plans for a friendly merger with Frankfurt’s Deutsche Boerse--a seemingly done deal until Monday--but could very likely spark a bidding war for the London exchange, the 227-year-old institution that became a public company earlier this year.

“They have brought the exchange consolidation out of the boardroom and into the market,” said Per Affrell, an analyst with UBS Warburg in Stockholm.

“Until now, we have not seen any unfriendly or even mildly unfriendly takeovers of stock exchanges around the world,” Affrell said. “Now you have a hostile bid and there are a lot of players who probably will think, ‘Oh, you can buy a stock exchange? That would fit nicely into our e-commerce strategy or our retail strategy or our technology strategy.’ I think this is only the beginning.”

Analysts consider the OM takeover bid to be serious, if unlikely to triumph. On Wednesday the Deutsche Boerse backed its proposed merger with the LSE and said it would be ready to join a joint rescue bid to fend off OM’s offer.

In the meantime, the Swedish technology company and operator of the Stockholm stock exchange has moved center stage in dramatic fashion.

On Tuesday, OM offered LSE shareholders 0.65 new OM share and about $10.50 in cash for each share held. LSE officials were dismissive of the bid, but immediately delayed indefinitely a scheduled Sept. 14 vote on the London-Frankfurt deal.

Critics of the London-Frankfurt proposal, who had been pushing for a delay on the vote because of what they said was a lack of adequate information, are pleased by the developments.

“This is an opportunity now for LSE to look at other competing bids and to assess all of them,” said Brian Mairs, spokesman for the Assn. of Private Client Investment Managers and Stockbrokers.

Many private investors had expressed concerns that a merged London-Frankfurt exchange, to be called iX, would favor large investment houses and push blue-chip stocks to the detriment of newer, smaller companies.

So have Euro-skeptics, who do not like the idea of common European marketplaces any more than they like the idea of a common European currency. To them, any wrench in the consolidation works is a good one.

Most analysts agree, however, that European stock exchange consolidation is inevitable, that a single European market demands a single forum for listing equities and raising equity financing. The question is simply which deals will prevail.

London has established itself as the European financial center for the 21st century, with its preponderance of banks and lawyers, English-language expertise and an excellent regulatory system. It wants to consolidate its position as the largest market in Europe, and other European stock markets want a foothold--which made the proposed deal with the highly successful Deutsche Boerse attractive to both parties.

Justin Urquhart Stewart, director of Barclays Stockbrokers, described the upheaval caused by OM’s bid as something akin to an episode in an ongoing financial soap opera.

“There is bickering between all of the national stock markets in Europe, which for years have been insulated by their own currency, technology and insularity from each other,” Urquhart Stewart said.

Occasionally the players got together for a brandy to discuss closer cooperation but they never achieved any coordination and, instead, “began to refer to themselves as national institutions, which made them akin to antiques,” he said.

“But new technology has meant people suddenly could look elsewhere. The stock markets are competitive and people can go to another country even. The stock exchanges realized they would lose investors if they did not become bigger, more efficient exchanges. . . . Now the struggle is to work out how to operate in the next century and how to create not so much a European stock exchange as a global exchange,” he said.

He expects Nasdaq, the U.S. electronic stock market, to come in with yet another proposal, possibly allying itself with London, Frankfurt and other smaller European exchanges “to try to provide a supra-national entity. . . . “

OM made its hostile bid on Tuesday after the LSE board rejected a friendly approach on Friday. However common a hostile bid for a public company might be, this one caught analysts by surprise primarily because it has never been done before in the case of a stock exchange.

Suddenly here was OM, an outsider and relative newcomer, suggesting that it could provide shareholders with better value, profits and competitiveness than the option selected by the LSE board. The London-Frankfurt merger would offer a bigger-is-better, economies-of-scale model of trading. A merger with OM, though smaller in terms of market capitalization, would have more efficient technology and effective marketing that would lead to greater cost savings. OM expects a more fragmented global marketplace driven by leaders in new technology, such as itself.

While LSE Chairman Don Cruickshank attacked the offer as insufficient and a spoiler, the Financial Times newspaper welcomed the bid: “A blast of refreshing northern air has blown into the debate on the future of Europe’s equity trading systems,” the newspaper said.

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Ranking Global Stock Markets

Here’s a look at the world’s largest stock markets ranked by the total value of the stocks they listed at the end of 1999. Also shown is where proposed market mergers would rank. OM Group, below, operates the No. 15 Stockholm exchange that is seeking to take over the much larger London exchange.

Source: International Federation of Stock Exchanges