Try, Try Again

The much needed consolidation of Europe's stock exchanges could be just around the corner. And this time round, CFOs might have reason to cheer.
Ian RowleyJuly 1, 2003

At first glance, May’s merger between OM of Sweden and Hex of Finland wasn’t the most eye-catching deal. After all, even combined, the two Nordic stock exchanges will still be small fry relative to the trading volume that the heavyweights — Euronext, London Stock Exchange (LSE) and Deutsche Borse. But to view the deal solely from that vantage point would be giving it short shrift.

Officials of Finnish and Swedish exchanges are at pains to point out that if the deal is completed as expected by September, OM-Hex — as the new group is calling itself — will be a big step towards creating a single trading platform for Nordic exchanges. Hex already owns and operates the Riga and Tallinn exchanges, while the Copenhagen, Reykjavik and Oslo exchanges — which currently use OM’s trading technology — have all said that they want to join the new Nordic alliance.

By combining forces, a Nordic exchange would have over 900 listed companies with a combined market value exceeding 500 billion euroes at current prices.

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Some stock-exchange observers also reckon the OM-Hex union marks the beginning of a fresh attempt at consolidating Europe’s labyrinth of 18 stock exchanges and 27 settlement systems. “With the onset of the bear market, moves towards consolidating Europe’s exchanges had gone off the boil,” says Lynton Jones, head of Bourse Consult, a stock exchange consulting company in London and Frankfurt. But the OM-Hex merger, he says, “is clearly a step in the right direction.”

He says that such consolidation is vital if Europe wants to compete head-to-head with the likes of the New York Stock Exchange (NYSE). With 2,366 listed companies that have a combined market capitalisation of $9.7 trillion (8.3 trillion euros), the NYSE dwarfes Europe’s exchanges.

LSE, Europe’s biggest exchange by trading volume, has more listed domestic companies — 2,815 at the end of May — but their combined value is far smaller at 1.7 trillion euros. Integrated European stockmarkets — and along with them, lower trading costs, greater liquidity and better access to a broader base of investors than national exchanges can offer — have long been a dream of many CFOs in Europe.

Those dreams have been dashed on many occasions, however. “If the fundamental question is, have any of the changes that have taken place so far within the European exchange industry helped listed companies, the answer is probably no,” says Bourse Consult’s Jones.

But of Europe’s 7,000 listed companies whose shares have been taking a battering recently, there’s some hopeful news. As well as the OM-Hex deal, LSE revealed in May that it was planning to set up a trading service to let Dutch banks and brokers trade their country’s blue-chip stocks on London’s computerised order book.

Meanwhile, the Swiss and German exchanges are also forging closer ties. Again in May, Jurg Spilmann, the Zurich-based chief executive of SWX, hinted that Deutsche Borse was a “preferred partner” for joint projects, including trading German stocks on virt-x, a SWX-owned electronic stockmarket in London.

What’s more, rumours abound that other high-profile mergers are on their way. Notably, Euronext — the exchange that was formed after the merger between the Paris, Amsterdam and Brussels exchanges in 2000 — is said to be courting the Spanish and Italian bourses, Europe’s fourth and fifth biggest exchanges.

The Milan exchange, in particular, appears to have developed close ties with Paris-headquartered Euronext. In April, it was widely reported that Jean-Francois Theodore, Euronext’s CEO, had held informal talks with his Italian counterpart, Massimo Capuano, who received a personal invitation from Euronext to join celebrations to mark the bicentenary of the Belgian exchange last year. For its part, the Madrid exchange is believed to favour closer ties with Deutsche Borse.

No Going Back

While much is mere speculation, what is clear is that the ability of Europe’s exchanges to offer their customers a single, efficient exchange is taking a lot longer than they once thought. Indeed, despite the bold plans following the launch of Europe’s single currency, the only notable consolidation to date has been Euronext, which has since taken the Lisbon exchange and the London-based Liffe derivatives exchange into its fold.

Not that the exchanges haven’t tried. A case in point: the trumpeted iX — a proposed merger between LSE and Deutsche Borse that collapsed in September 2000. Or OM’s audacious bid for LSE later the same year, which also came to nothing.

And remember when eight of Europe’s national exchanges — including Deutsche Borse, LSE and the exchanges that were to become Euronext — botched a plan to create an alliance of eight exchanges trading 400 of Europe’s leading blue-chip stocks in late 1999? “People underestimated just how difficult it would be to consolidate Europe’s exchanges,” says John Woodman, a partner at Efficient Frontiers, a securities industry consultancy.

There are numerous reasons for the failures — from unrealistic expectations to nationalism to the bear market.

Then, of course, there are the egos of exchange bosses. Woodman notes that that though the bourses’ chief executives say that they are keen to press ahead with consolidation in principle, they’re not so keen to do a deal that puts them out of work. “In part, consolidation is about leaders potentially losing their jobs,” he says. “There’s a tremendous self interest in delaying it.”

However, with some justification, the exchanges say that they’re not the only ones to blame for the slow pace of consolidation. Earlier this year, Don Cruickshank, the outgoing chairman of LSE, said that further consolidation of Europe’s exchanges needs to happen in step with EU-level regulatory reforms, which are expected to be completed by 2005.

With or without EU action, this is going to be an evolution, not a revolution. “I expect Europe to have just two or three pools of liquidity in the next two to three years,” says Bruno Roche, a corporate financier at BNP Paribas in Paris.

Power of Three

The question is, which model of consolidation is likely to prevail? Deutsche Borse, Euronext and LSE seem to have markedly different growth strategies.

Clara Furse, chief executive of LSE, says she’s betting on organic growth to bolster LSE’s position, but others doubt that alone will be enough. Right now, LSE seems to be under the most pressure to act, notes Manus Costello, an exchanges analyst at Merrill Lynch in a May research note. “Ultimately, we think that LSE will have to do some kind of deal with one of its European peers,” he says.

As for the Frankfurt exchange, its battle plan is to create a vertically integrated exchange, comprising share and derivatives trading. Is has made some progress: Eurex, which Deutsche Borse co-owns with the Swiss bourse, is now the world’s largest derivatives exchange.

Meanwhile, the acquisition of the 50 percent of Clearstream International, a custody and settlement firm, that it didn’t own boosted its trade processing prowess. However, while Frankfurt has established technology alliances with the Irish and Austrian bourses, full mergers those and other equity exchanges haven’t materialised. The main problem, note exchange watchers, is one of inflexibility.

“Deutsche Borse seems to be operating on an ‘if you’re with us, then use our systems’ basis,” says Bourse Consult’s Jones.

But Euronext allows other exchanges a greater degree of autonomy. While sharing the same trading technology, each of the four equity exchanges that make up Euronext continues to trade in its home country, and has a separate rulebook. Likewise, derivatives exchange Liffe has kept its own systems and most of its senior management since being acquired by Euronext.

Although critics point out that Euronext’s quasi-federal approach to consolidation means that synergies take longer to come to fruition, the Paris-based bourse has been the most successful at attracting other exchanges. For evidence, consider the deals with the Lisbon bourse and Liffe.

There are also signs that the benefits of Euronext’s unions are coming through. In a recent research note, BNP Paribas analyst Claire Langevin wrote that post-merger integration was “well on track.”

Woodman of Efficient Frontiers adds that it’s probably no coincidence that OM-Hex has a lot in common with Euronext’s model. Following its initial formation, the smaller Nordic exchanges are expected join one by one at their own pace. Until now, “Euronext has been the only place where true consolidation is really taking place,” he says. CFOs will no doubt be crossing their fingers, hoping that OM-Hex will change all that.