Recession Equals Compression

Vienna’s Wiener Borse co-chief Michale Buhl battles Warsaw for stock exchange dominance.


Companies in Central and Eastern Europe and foreign investors have long bemoaned the balkanized state of the region’s equity market, with its myriad small national stock exchanges fragmenting liquidity and slowing the introduction of modern technology. But now severe recession seems to be doing what two decades of economic transition have failed to accomplish — accelerate the combination of the area’s bourses.

Vienna’s Wiener Börse has taken a decisive lead by acquiring control of three major regional exchanges in the past year. In June it paid an undisclosed sum for the 25.5 percent of the Budapest Stock Exchange owned by Italy’s UniCredit Group, giving it a controlling 37.7 percent stake in the Hungarian market. Later that month the Wiener Börse bought 81 percent of the Ljubljana Stock Exchange from the Slovenian government for €38.1 million (worth $60.2 million at the time). And in November, it purchased 92.4 percent of the Czech Republic’s Prague Stock Exchange from a group of local banks and brokerages for an estimated €163 million.

“The economic storm that began last year definitely helped us speed up Central European bourse consolidation,” says Michael Buhl, co–chief executive of Wiener Börse, 50 percent of which is owned by Austrian banks and the balance by some of the country’s listed companies.

The Prague, Budapest and Ljubljana stock exchanges are the CEE region’s third-, fourth- and fifth-largest by market capitalization and trading volume, respectively, behind Wiener Börse and the Warsaw Stock Exchange. Buhl aims to put all three exchanges on the same trading platform as Vienna’s and extend a common membership to brokers.

Vienna and Warsaw had been in close competition, with virtually identical trading volumes and market capitalizations of their listed companies. Now Vienna is roughly twice as large as Warsaw, with a market cap of its listed companies of €89.2 billion and average daily volume of €228.4 million in the first two months of this year. Warsaw, by contrast, has a market cap of €47.8 billion for its listed companies and average daily volume in January and February of €112.4 million.

Those numbers have prompted the liberal government of Polish Prime Minister Donald Tusk to abruptly ditch plans to float a 49 percent stake in the WSE and keep the balance in state hands. Instead, Deputy Treasury Minister Michał Chyczewski announced in February that the government was inviting Europe’s four leading players — Deutsche Börse, the London Stock Exchange, NYSE Euronext and Nasdaq OMX — to bid for a controlling stake in the WSE of as much as 73.8 percent.

“Without a major league partner for the WSE committed to developing Warsaw as a regional financial center, the long-term risk of losing ground has increased significantly” as a result of Vienna’s moves, says Chyczewski, a baby-faced 29-year-old former senior economist at Poland’s Bank BPH who is driving the government’s plan to make Warsaw a regional financial center.

None of the four exchanges would comment, but Chyczewski, who is being advised by UniCredit, tells Institutional Investor that he has met at least two times with each and that he expects to sign a takeover agreement with one of them by the fourth quarter.

The WSE has had only modest success in expanding its footprint. It spent an undisclosed sum to buy 1.8 percent of Romania’s tiny Sibiu Monetary Financial and Commodities Exchange in 2007, and boosted that stake to 5 percent last year. The WSE also bought 25 percent of Innex, one of two Ukrainian stock exchanges, last July for an undisclosed sum. It lost out in the bidding for Budapest, Ljubljana and Prague largely because management spent too much time trying to increase cross-listings rather than courting those exchanges, according to Chyczewski. The biggest independent markets remaining in the CEE area are the Bulgarian Stock Exchange and Romania’s Bucharest Stock Exchange.

“We’ve experimented with organic growth, and the results have not been satisfactory,” says Chyczewski. He believes Warsaw’s best bet is to become the regional hub of a big global exchange and thinks the successful bidder may want to bring Vienna under its wing.