Exchange of views

The LSE and Deutsche Boerse: A rocky road to marriage

By BBC News Online's Mike Verdin

If the devil indeed is in the detail, the publication in July of plans to merge Britain's and Germany's major stock exchanges represented the unveiling of a satanic super-palace.

Certainly the idea seemed good in principle. Why not follow German and British corporates, such as Deutsche Bank, which have been happily consolidating for years and launch in iX a stock exchange fit for a Europe with a single market and ever-closer business ties?

Why not allow British companies easier access to German capital? Why not launch an exchange which enables Britons keen to invest in BASF or Deutsche Telekom, the kind of German companies opening offices in Britain or bringing business here, to buy shares without having to negotiate border obstacles?

Werner Seifert: iX's chief executive elect

Individual city firms, after all, have seen the potential for a pan-European stock market, with Morgan Stanley Dean Witter proposing its own alternative trading system, Jiway.

But iX's conception has in London been surrounded in controversy. Critics have focused on the nitty gritty of how a unified exchange would actually operate.

Deadline near

And the furore is only likely to increase as the deal approaches the 14 September deadline when it will be voted on by the London Stock Exchange's shareholders - who need to give the proposal at least 75% backing to pass it.

Among iX-sceptics are investment firm Guinness Peat Group, chaired by New Zealander Sir Ron Brierley, who, as a corporate raider of his experience might, is pressing to unlock LSE assets.

London, in sharing iX 50:50 with Germany's Deutsche Boerse, is receiving a raw deal, says Sir Ron, who has called for shareholders to be paid a £10 special dividend, and is buying up LSE stock to strengthen his claim.

But, with individual holdings in the LSE limited to 4.9% by constitution, Sir Ron's challenge on its own is of little significance.

Concerns close to home

More serious to the LSE are the concerns raised by organisations such as Apcims, the Association of Private Client Investment Managers and Stockbrokers, which should rank among core supporters of the merger, yet has gone public on its concerns over the small print.

Apcims, whose members control about a third of LSE shares, is worried about the German technology, Xetra, which will be adopted as iX's trading platform.

Trading a share is one thing. Paying for it and becoming its registered owner is quite another and is in many ways more complex and costly

Angela Knight, Apcims

"There are question marks over its reliability," said a spokesman for Apcims, which visited Frankfurt on 18 August to see Xetra in action.

Furthermore brokers in London four years ago forked out £400,000 for the LSE's own trading system, and are being offered only £30,000 to install Xetra. "That's only about enough to pay three IT professionals for a week."

Apcims is also worried about the effect of the merger on back office operations - the settlement work which ensures that, once deals are done, shares are paid for, allocated and registered.

"Trading a share is one thing. Paying for it and becoming its registered owner is quite another and is in many ways more complex and costly," said Apcims' chief executive Angela Knight.

Lost in the middle

Elsewhere, the Quoted Companies' Alliance is concerned how the formation of iX, which will encompass a blue chip market traded in London, a high-tech "growth" market in Frankfurt plus national exchanges, will affect mid-ranking firms.

We are worried that interest in companies at our level will fall, liquidity will fall, and a downward spiral will set in

John Pierce, Quoted Companies' Alliance

"Where does that leave our members?" said John Pierce, chief executive of the QCA, which represents companies quoted on the LSE outside the top 350. "We are worried that interest in companies at our level will fall, liquidity will fall, and a downward spiral will set in as stocks in our companies look less and less attractive."

There have been rumours of defections to other markets, for example, Tradepoint, unless the LSE allays the QCA's fears.

Indeed, it looked as though it would be larger firms who stood to benefit most from the merger. Hence the surprise noted on 18 August when UBS Warburg, a huge investment bank which had been thought an iX supporter, voiced disquiet over the merger details.

Potential for success

Few doubt that such concerns can be allayed, as the UK and German regulatory authorities showed on 21 August when announcing a work programme for a joint Anglo-German regulatory framework, and winning broad approval on an issue that had been particularly contentious.

But the statement, which announced the setting up of six working groups to investigate regulatory points, also revealed the scale of the problems which need to be tackled.

And the LSE has only until 14 September to convince the City that such difficulties will be overcome.

Spread betting firm Financial Spreads was on 21 August banking on the LSE receiving only 69% approval for the merger. The sure bet is that the vote will be close.