Late August 2001: LIFFE*, the prestigious British derivatives exchange, is up for auction.
For Euronext - a newly minted combination of the former
Paris, Amsterdam and Brussels stock exchanges – this could be a perfect opportunity to position itself as one of the consolidators in the industry, rather than waiting to become one of the consolidatees.
But the prize will not come easily. In the battle for LIFFE,
Euronext will be up against the two biggest and most powerful stock exchanges in Europe, and one of them will be fighting on home ground….
*
London International Financial Futures and Options Exchange
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How can Euronext communications chief
Thierry Barthez and CEO Jean-Fran
ç ois
Th éodore succeed where others have failed, in persuading a London exchange to sell out to a little-known foreign buyer?
(for an idea of the challenge this represents: imagine a French-controlled company being allowed to buy NASDAQ or the Chicago Mercantile
Exchange!)
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• A marketplace, physical or virtual, where participants trade one or more types of financial products, such as:
– Stocks and stock indices (known as “cash” markets)
– Derivatives e.g. options, warrants, futures
– Commodities e.g. metals, oil, cocoa
– Currencies
4

• A cross-border stock and derivatives exchange
• Formed in 2000 from merger of Paris,
Amsterdam and Brussels exchanges (the first ever successful merger in the industry)
• Became a public company in July 2001
IPO
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• What kind of industry is this?
– Highly fragmented into regulated local monopoly markets (18+ national stock exchanges in Europe)
– Most exchanges owned/operated as mutual-cooperatives
– Customers are financial institutions, not the general public
• What dynamics are operating within it?
– Global market forces and financial institutions pushing for larger pools of capital, more liquidity, lower trading costs, ease of cross border transactions
– Political interests seeking to preserve national exchanges
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• Changes in ownership status and structure
– Deutsche Börse (DBAG), London Stock
Exchange (LSE) & Euronext become public listed companies in 2001
• Beginnings of merger activity:
– Euronext born in 2000 from three-way merger, creating #3 exchange in Europe.
– DBAG attempts, unsuccessfully, to merge with the LSE in 2000, as does OM, operator of the
Stockholm Stock Exchange.
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How the combatants compare
LIFFE -
LSE #1
Euronext #3
DBAG #2
Sources: company annual reports
#3
-
#2
#1
€144m+
€315m
€698m
€760m
*
+
Key
Member of European
Union (EU)
Member of EU but not in
European single currency
Exchange
Market position in Europe, by volumes traded
2000 revenues
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• Adds scale and scope:
– Complementary products
– Presence in London – a key world financial center
• Technology
– Access to LIFFE’s CONNECT trading system
• Credibility
– A successful LIFFE acquisition would position
Euronext to make further mergers/acquisitions elsewhere in Europe.
– Losing will put it a distant third to DBAG and LSE.
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• Cash from IPO
• Can switch to LIFFE
CONNECT trading system
• Can offer LIFFE traders access to Euro products
• Could give LIFFE selfgovernance from London
• Same language, location and currency as LIFFE
• Same regulator
• Complementary products (LIFFE offers options on LSE stocks)
• Cultural/political issues
• Different regulators
• Still facing integration issues from 2000 merger
• Still new on the scene
• Did not raise spare cash from IPO
– will need to make cash & shares offer
• Faces tough choice: keep own trading system or switch to LIFFE CONNECT
• Likely to need full integration to achieve synergies
• Cash from IPO
• Can offer LIFFE traders access to Euro derivatives
• Probably strongest exchange overall in
Europe
• EU anti-trust issues
(#1 already in
European derivatives market)
• Recent failed merger with LSE
• Cultural/political issues
• Different regulators
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WHO?
HOW ?
LIFFE
MANAGEMENT
LIFFE’S
REGULATORS
LIFFE BOARD
LIFFE Board
(consisting of its
• CEO
Freedberg,
Chairman
Williamson
• Advises board on strengths of business cases submitted by bidders customers) choose which bid to accept bid to accept
• UK Financial
Services
Authority & the European
Competition
Commission
• Must approve the merger
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• Focus on customers
– LIFFE shareholders are also its customers: their long term livelihood is at stake. Euronext stressed its commitment to lowering trading costs, increasing liquidity and keeping existing technology.
• Build trust
– Consistent words and deeds: consistency between business case and Euronext’s corporate strategy: consistent in all communications with LIFFE.
– Exemplary behavior during auction: no leaking bids or negotiating through press.
• Be open, but keep low profile
– Hard to win hearts of public, and probably not necessary.
– Many in UK still very “Euro-sceptic”: sensitivity required when talking about long term goals for European integration.
• Be mindful of long term objectives
– UK government may be unlikely to intervene, but aggressive or insensitive approach might harm political chances for later acquisitions elsewhere in Europe.
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• Phase one (during auction):
– Sell acquisition business case to LIFFE management & shareholders (focusing on customer benefits)
– Limited media interviews; no public discussion of bid
– Use English native speakers to help draft board presentation, key messages and press releases
• Phase two (if bid is successful):
– With assistance of LIFFE management, inform and educate UK politicians and regulators; European Competition Commission
– Educate LIFFE and Euronext employees on acquisition rationale, benefits for customers
– Sell acquisition business case to Euronext shareholders (focus on long term value and customer benefits)
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2000
Nov
2001
Feb Apr Sep July Aug 5
Formation of
Euronext announced: LSE refuses to join
DBAG merger with
LSE fails
OM bid for LSE fails
DBAG IPO
LSE IPO Euronext
IPO late Aug Sep 27 Sep 29 Oct 25 Oct 28 Oct 29
LIFFE rumors begin
LIFFE says it has received a
“number of approaches”
LSE says it plans to bid between
£12-£15
Sources: Company press releases; The Independent, 10/30/2001 .
Final bidder presentations to LIFFE board: LSE reportedly bids £18.50
a share
LIFFE reportedly rejects last minute
LSE bid of £19 a share
LIFFE and
Euronext announce an agreed deal at
£18.25
a share
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• Strategy is only as good as its articulation
• Customers are the ultimate decision-makers
• In every battle, never forget the objectives of the war (i.e., manage for tomorrow)
• Consistency of word and deed is essential in building trust and reputation
• You can never understand too much about the environment in which you operate
• Cash is not always king...
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