Euronext’s new lease on Liffe

The City of London tends to take an arrogant view of European stock exchanges, dismissing Continental bourses as nationalistic empire builders unfamiliar with hard-headed commercialism.

The City of London tends to take an arrogant view of European stock exchanges, dismissing Continental bourses as nationalistic empire builders unfamiliar with hard-headed commercialism.

By Tom Buerkle
December 2001
Institutional Investor Magazine

London Stock Exchange chairman Don Cruickshank struck that pose earlier this year at a conference of European bankers and exchange officials: He lambasted LSE’s erstwhile suitor, Deutsche Börse, claiming it ignored users’ needs for cheaper, more efficient clearing and settlement - and then left the conference before his German rivals could respond.

But the LSE’s high-handed attitude is partly to blame for last month’s decision by the London International Financial Futures Exchange to join forces with Paris-based Euronext rather than with the LSE. As a listed company with strong venture capital participation, Liffe has an unimpeachable commercial focus. Its decision to go with Euronext validated the pan-European model developed by that exchange’s chairman, Jean-François Théodore, and exposed the LSE’s failed bid as a nationalistic ploy short on logic. “Euronext fit our criteria,” says Liffe CEO Hugh Freedberg. “In every respect it was just a better bid.”

Flush with funds from its June IPO, Euronext was able to make an all-cash offer of £18.25 ($26.20) a share that was more attractive than the LSE’s £18.50 cash-and-share offer, especially in the eyes of the venture capitalists who owned 29 percent of Liffe. Moreover, Euronext’s strategy appealed to Liffe’s constituents. It plans to put its derivatives business on Liffe’s electronic platform, Connect, combining Euronext’s emphasis on retail equity options with Liffe’s institutional, fixed-income futures trading. That promises higher volumes and greater stability for Liffe’s existing users and leaves Freedberg and Sir Brian Williamson, Liffe’s chairman, in charge of the show. “Jean-François Théodore said, ‘No disruption.’ No disruption to the user community. That was the winning phrase,” says Richard Berliand, head of futures at J.P. Morgan Chase and a Liffe director.

In contrast, the LSE’s proposal to create a new platform to trade both equities and derivatives entailed high cost and high risk with little obvious benefit. “A combination of fixed-income futures with cash equities is of very minor interest indeed,” says Berliand.

Even on a personal level, Théodore outshone Cruickshank and LSE chief executive (and former Liffe director) Clara Furse, who instigated the bid. The LSE’s attitude was “this is a takeover, we’ll do it our way,” Freedberg says. “One never, ever got that message or feeling from Jean-François. He did a superb job of winning hearts and minds. He made sure he and his team got the message across: This is a partnership.” The deal gives Théodore - who successfully wedded the Paris, Amsterdam and Brussels bourses - a base plus credibility in Europe’s biggest financial market. “It significantly enhances Euronext’s position,” one person close to the LSE acknowledges.

But the deal doesn’t signal that a major consolidation of Europe’s exchanges is imminent. Euronext needs to focus on integrating Liffe. Deutsche Börse is preoccupied with its bid to gain full control of Clearstream. And the LSE’s strategy remains up in the air. Furse, putting a brave face on the defeat, said the exchange was discussing cooperation with the New York Stock Exchange, the Nasdaq Stock Market and the once-maligned Deutsche Börse. “Are they shell-shocked? Yes,” says Nasdaq CEO Hardwick Simmons.

The endgame among Europe’s bourses has yet to begin. But as one Liffe director sums up the Liffe contest, “The LSE loses, but London wins.”

Related