Challenging times ahead for London Stock Exchange as rivals press claims

With its proposed merger with the Deutsche Borse "parked" while it defends itself against the hostile £900 million sterling (€1.4 billion) bid from the Swedish OM group, and its shareholders in revolt, the London Stock Exchange's (LSE) management team is in serious trouble. Amid all the confusion the only certainty now is that the days of the London Stock Exchange in its current form are numbered.

The LSE management team had proposed a merger with the Frankfurt-based Deutsche Borse to form iX. The move was aimed at ensuring that the LSE would be a key player in whatever pan-European stock exchange emerges as the dominant player in consolidating European markets. It was also aimed at bolstering its own technological capabilities as Internet-based online 24 hour trading takes hold in Europe.

But the management team never really convinced the LSE members who own the exchange of the merits of the iX deal. The LSE is owned by about 300 members who will vote on any merger/ bid - a 75 per cent majority would be needed to pass the merger.

Now, the vote of LSE members planned for September 14th has been postponed after an attack on the management team by 11 shareholder firms and the hostile bid for the LSE from the OM Group. Deutsche Borse is, however, sticking to the plan and members will vote on September 14th.

The management team said the merger would result in annual cost savings of £50 million, more liquid equity markets and greater access for companies to new capital. But critics of the iX plan have become more vociferous as an alternative has emerged. That is not to say they will accept the OM bid. But they want to see a wider consideration of alternative options for the LSE in the consolidation of exchanges that is now underway.

A number of criticisms have been made of the proposed iX deal have been made:

The structure of the deal as "a merger of equals" - both exchanges will have equal stakes in iX. This has been heavily criticised in London where brokers feel that it undervalues the LSE.

Cost savings from the proposed cross-border clearing and settlement arrangements would not be enough.

Aspects of the plan were too vague.

A growing concern about the management style of Deutsche Borse chief executive Mr Weiner Seifert. He is to be chief executive of iX the merged entity. Concerns have increased following the announcement that the head of the Swiss-German Eurex derivatives market - a joint venture between the Deutsche Borse and the Swiss Stock Exchange - is to retire in January before his contract ends. There have been suggestions that his decision follows clashes with Mr Seifert. Among the most vocal critics of the iX plan is Mr Eric Anstee, the chief executive of Old Mutual's financial services division which is the LSE's second largest shareholder with a 2 per cent stake. Describing the merger plan as flawed, he said it would be impossible to sell it to members and called on the LSE management to "go back to the drawing board". And he warned that the confusion was hurting business and forcing companies to delay other initiatives such as new technology platforms. But Mr Anstee was sceptical of the OM Gruppen bid and said he wanted any deal to include LIFFE, the London International Financial Futures and Options Exchange. He suggested that a merger between LSE and LIFFE would solve the LSE's technology problems and allow the merged unit to negotiate deals with European stock markets from a position of strength.

His criticism followed that of a group of 11 retail stockbroker shareholders who described the merger plan as "a dead duck" and expressed "general disgust" with LSE management. And executives at shareholder Merrill Lynch who examined the merger plan found that integration of the exchanges would not be achieved for a considerable time and that the operating costs of the combined exchange would be "exceptionally high".

The OM cash and share bid (£7 sterling in cash and 0.65 new shares for each LSE share) for the LSE has shown members that there is an alternative to the iX plan and that other bids/proposals are likely.

Some time ago, before the proposed merger with Deutsche Borse was mooted, another panEuropean trading platform was emerging through the merger of the Paris, Brussels and Amsterdam exchanges to form Euronext. This is to come into operation on September 22nd. But last April the Euronext partners invited LSE to become part of their merged entity - they said their proposal was not considered.

But this week, against a background of mounting criticism, LSE chairman Mr Don Cruickshank said: "The board will carefully evaluate the alternatives put before it. So far we have two: the merger proposal with Deutsche Borse and the OM bid." Mr Cruickshank had earlier dismissed the OM bid as "derisory".

The value of the LSE has risen since the bid. The OM offer valued the LSE at £808 million sterling. But the rise in the OM share price has increased the value of the offer to about £900 million. And the imminent publication of the OM offer document is expected to flush out other potential bidders. Among the possibilities are:

A white knight strike from the Deutsche Borse, possibly made with other partners such as the Milan and Madrid bourses or even with Euronext.

A merger proposal from the US technology market Nasdaq.

While Nasdaq already has an agreement to become involved with a merged LSE/Deutsche Borse operation, the US exchange will be watching the developments in Europe with interest. It's priority is to ensure that it is part of whatever major pan-European trading platform emerges.

Another merger proposal or a bid from the pan-European Euronext exchange. Euronext is said to be in talks with investment banks about funding for a possible bid.

The emergence of other bidders. These could include companies with the appropriate technology or companies in the financial markets or a combination of both types.

While the OM bid has put a value on the LSE it has its critics too. Concern has been expressed about OM's ability to handle the volumes in London - both the range of products and the size of the throughput - though its technology is seen as well advanced. Some critics consider the cash element of the deal to be too low. And there is concern that OM may not interested in forming wider linkages with other European markets. LSE broker shareholders now want to meet OM to discuss its bid and to establish how OM proposes to run the LSE and its future strategy.

OM Gruppen, led by chairman Mr Olof Stenhammar and chief executive Mr Per Larsson, is a fast growing Swedish securities and technology group which was founded just 15 years ago to deal in options (OM stands for Options Market). The group, whose costs as a percentage of revenue are much lower than those of the LSE and Deutsche Borse, grew strongly and in 1998 it took over the Swedish Stock Exchange. Its hostile bid for the LSE was launched on August 29th after a friendly approach was rebuffed.

But where does the Irish Stock Exchange fit in? The Irish Stock Exchange is not directly involved. But it could benefit if the iX arrangement goes ahead. The exchange has already adopted the Deutsche Borse Xetra electronic trading system and it uses the same Crest settlement system as the LSE which would be merged with the Frankfurt Clearstream system under the merger plan. So the exchange could fit in quickly with a merged LSE/Deutsche Borse.

While the Irish Stock Exchange separated from the LSE in 1995 after 25 years of merged operations, most of the Irish stockbroking firms held onto their membership of the LSE after the split. And as shareholders in the LSE and will be in the line for windfalls if the OM bid succeeds.

Whatever the outcome of the OM bid and the iX plan, all the exchanges in Europe are facing into a period of change and Dublin will be no exception.