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Tuesday, 29 August, 2000, 15:54 GMT 16:54 UK
Swedes battle for LSE
Per Larsson and Olof Stenhammar
OM's founder Olof Stenhammar (right) with chief executive Per Larsson
It has all the ingredients of a financial fairy tale. First the guardians of the London Stock Exchange propose marriage to a rich German prince, Deutsche Börse.

Then, two weeks before the plans are to be approved by City and Frankfurt courts, enter a swashbuckling Swede, named OM Gruppen, bristling with new fangled devices.

As for how handsome this new suitor is... that is what the almost 300 London Stock Exchange (LSE) shareholders are considering after OM Gruppen on Tuesday formally proposed to take over the exchange.

In its favour, OM, essentially a technology company, boasts some of the world's most esteemed trading software, used by 20 international exchanges and clearing houses, which has helped its market capitalisation grow tenfold to £2.6bn in the last five years.

Tough competition

But it is pitching against Deutsche Börse, the world's sixth biggest exchange, which boasts more than twice as much revenue, and lists a far greater number of Europe's large companies.

The largest stock exchanges ($ bn)
New York (NYSE) 11,438
Nasdaq 5,205
Tokyo 4,455
London 2,855
Paris 1,503
Deutsche Börse 1,432

(Market capitalisation, end 1999)

Hence many observers see in OM's £808m bid not so much as a plucky battle as an attempt to make mischief, and gain a great deal of publicity in the process.

OM was launched in 1985 by Olof Stenhammar, a former swimming pool salesman, regarded in Sweden as one of the country's top entrepreneurs. (His shares in OM are worth more than £1bn at Tuesday's prices.)

He gained his first experience of financial markets as a broker in Chicago in 1972, leaving two years later to work at publisher Bonnier, where he rose to become executive vice-president.

He launched OM in 1985 as a pioneer in electronic trading, and expanded the firm from its roots in derivatives markets to attract, among current clients, the Australian and Hong Kong stock markets and the Chicago Board of Trade Clearing Corporation - the world's largest independent clearing house.

London presence

In London, OM owns and runs operations including Pulpex, a pulp futures market, the Environment Exchange and the OM London Exchange.

History of OM Gruppen
1985: Launched to offer Swedish options trading
1994: US (Amex), Hong Kong futures and Milan exchanges become clients
1998: Merges with Swedish stock exchange
2000: August 29, launches hostile bid for London Stock Exchange
2000: November, to launch Jiway, global exchange, with Morgan Stanley Dean Witter

And it has already completed a successful takeover of a stock exchange - the Stockholm Stock Exchange, which OM bought two years ago and sees as something of a test case for an LSE takeover.

For OM last year oversaw the upgrading of the Stockholm exchange with the kind of software the company proposes to bring to London, and which many observers see as superior to the Xetra system offered by Frankfurt in the Anglo-German tie up.

"Member impact was kept to a minimum" during the Stockholm changeover, says OM's bid document, which claims the new software has enabled the exchange to develop cost effectively, and on a range of fronts.

Opportunities in the City

London gives OM the chance to achieve the same kind of revamp for vastly greater rewards, the company believes.

Five months at the LSE
April 20: Don Cruickshank, now chairman, joins board
May 3: LSE and Deutsche Börse announce plans to form iX
July 17: Publishes more detailed look at iX
July 24: LSE shares start trading
August 29: OM confirms takeover bid

What the LSE offers is, as OM's chief executive Pers Larsson said on Tuesday, a "global brand" ripe for exploitation.

Certainly the LSE, as the world's fourth biggest stock market, should be looking to become a focus for a pan-European stock market, OM says. Indeed, this is largelly what LSE proposes in forming the unified iX exchange with exchange with Deutsche Börse.

But whereas the iX plans are flawed in their "limited regard to the technological and commercial changes in the global equity markets," OM claims to offers LSE the "key elements needed for growth".

Mr Larsson, in essence, sees LSE's best hope as relying on OM's cutting edge technology, rather than Deutsche Börse's reputation.

The OM deal would also maintain the jurisdiction of the Financial Services Authority over regulatory matters, rather than requiring the drawing up of a new code as necessitated by the iX plans.

Harnessing new technologies

OM proposes to extend the LSE services available on the internet and through WAP phones by, for instance, using the net to distribute market prices, reference material and clearing reports, as well as for gaining feedback from customers.

OM says it could harness its "marketing expertise" to make London a more attractive market for new issues (IPOs).

And Mr Larsson sees the UK profiting more from a boom in the market for equity warrants, a derivative similar to an option, which is growing rapidly on the Continent.

"The warrant market in the UK is underdeveloped in comparison," OM's bid document says.

Indeed, OM sees the possibility of operational tie-ups between the LSE and Liffe, London's futures exchange.

"Inferior proposition"

Liffe would probably not oppose such co-operation. "We have a great deal of respect for OM's technology," a spokeswoman for Liffe told BBC News Online. Liffe itself boasts a cutting edge trading platform, she said.

Don Cruickshank, chairman of the London Stock Exchange
Don Cruickshank: OM's offer is "unacceptable"

The LSE, however, sees the OM bid as "an inferior business proposition", which would not create the pan-European presence promised by an Anglo-German merger.

Nor would it bring the strength in derivatives inherent in a link up with Deutsche Börse's front-running derivatives market, inlcuded in the iX deal.

Shareholders also seem to be wary of OM's offer, not least because it values the LSE at £27, not a huge premium over Friday's closing price of around £23.50. A large quantity of the £27 is also paid in OM stock, which many observers feel is overvalued.

"What is welcome, however, is the emergence of another bidder," a spokesman for an LSE shareholder told BBC News Online. "It will force LSE and Deutsche Börse to be more forthcoming on major issues of their proposal, matters of detail, which have not been revealed as yet."

So shareholders already look to gain, in information terms, from OM's bid.

If OM is willing to improve its offer and prove its seriousness, and if Deutsche Börse indeed mounts a rival bid and sparks a takeover battle, that gain looks likely to become financial too.

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21 Aug 00 | Business
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