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INSIGHT: London-Frankfurt link is just the start for Europe’s equities

After much speculation, the London Stock Exchange and the Deutsche Borse confirmed their plan to create a new company, iX, or international exchanges, consisting of all their business, except for Frankfurt’s 50% stake in the Clearstream settlement system.

Assuming the exchanges’ shareholders approve the deal, the merger will create Europe’s largest stock market – 45% of Europe’s top 300 companies already have their primary listings on the London or Frankfurt exchanges. A bonus for multinationals was the news that iX and Nasdaq have signed a memorandum of understanding to create a pan-European high-growth market, built on the foundations of London’s techMARK and Germany’s Neuer Markt.

Venture capitalist experts celebrated the news. ‘The stupid battle [between London and Frankfurt] over which is the most important city is over,’ said Ken Olisa, managing director of Interregnum, the specialist IT venture marketing company. ‘Secondly, by bringing in Nasdaq there’s no wasted energy on starting the battle all over again. That consolidation is wholly good news.’

UK finance directors agreed. ‘As a representative of the bigger companies in the UK, I welcome anything that leads to the globalisation of the securities industry, share dealing and listing, and increases the ability of major companies to access global capital markets,’ said John Coombe, finance director of Glaxo Wellcome and chairman of The Hundred Group. ‘The sooner we move from a European to a global market the better.’

Eric Hutchinson, finance director of growing electronics group Bowthorpe, commented: ‘We welcome any step towards the development of a global equity market and establishing a European equity market is a good first step. Nasdaq’s involvement is also something we would welcome very much. We are an international business and we would like to access a wider capital base. It’s definitely something we are very excited about.’

Andrew Given, finance director of Logica, said he believed the move an ‘inevitable consequence’ of current trends in the financial markets. ‘Given that you have many marketplaces that are simply virtual on the Internet, having lots of little local stock markets seems a dated concept,’ he said.

Immediate media coverage following the announcement speculated about the future of sterling listings. This was inflamed by a line in the merger announcement stating that ‘subject to market conditions and consultation, the aim is for all European equity trading ultimately to be undertaken in euros’. A spokeswoman for the LSE stressed that initially UK companies would have a choice between being quoted in sterling or euros, but that market forces would ultimately decide the outcome. UK FDs in large companies appeared relatively unflustered.

‘I’m of the view that it doesn’t matter whether the listing is in sterling or euros,’ said Hutchinson. ‘Reporting in euros would not be a concern to me at Bowthorpe.’

Paul Smith, corporate finance partner at Ernst & Young, backed Hutchinson’s response. ‘I don’t doubt that companies will go for dual quotes and increase the liquidity in their stocks,’ he said. However, Coombe acknowledged that investors might see things differently. ‘The majority of our shareholders are sterling-based and we need to deliver sterling earnings,’ he said. ‘You can hedge, but it would seem to me that until the UK was part of the euro system it would pose issues for UK companies.’

One other potentially problematic issue concerns the future regulatory regime. Under the merger plans, blue chip stocks will be traded and regulated in the UK, but the new high-growth market in Frankfurt will operate under German regulations. Companies in neither group will continue to be subject to their national regulatory regimes. However, it does seem doubtful that market forces will support differing regulatory requirements, particularly since the German regulatory regime is generally considered to be less well-developed than the UK’s.

‘Are we going to get consistent listing requirements between stocks based in the UK and stocks based in Germany?’ asked Jeremy Stockwell, a principal consultant in the regulatory services practice at KPMG. ‘What’s going to happen if stocks that have been listed on one market need to move to another? If you wanted to move in London from a secondary market to the main market, there was at least a consistency of approach in how you would handle things. At the moment that’s not the case between the UK and German markets.’

Katie Morris, director and secretary general of the European Association of Securities Dealers agreed. ‘There’s obviously a stark contrast in the way companies are structured and governed in the UK and in Germany,’ she said. Morris cited the differing preference for one-tier or two-tier boards as one example of the differences. With great timing, the EASD recently launched a set of recommended corporate governance principles for Europe in an attempt to stimulate the creation of a common framework.

Finally, what of the middle-sized companies that sit in neither the blue chip nor the high-tech camp? ‘We are going to be watching closely from the point of view of the smaller quoted company because this could isolate them even more,’ says John Pierce, chief executive of CISCO, the body that represents smaller listed companies. ‘All the attention will be on the bigger stocks and it could leave unnoticed the smaller UK companies if we are not careful.’

Despite these concerns, the general consensus is that the merger is beneficial. Andrew Beeson, chief executive of Beeson Gregory and a founder shareholder of Easdaq, welcomed the news. ‘It doesn’t create the pan-European market that we wanted, but it’s a step in the right direction,’ he said.

The move is not likely to be the end of stock market consolidation. iX is already in merger talks with the Milan and Madrid markets, and Beeson does not rule out the idea of a future link-up between iX and Easdaq. ‘I don’t think that is inconceivable,’ he said. ‘It’s quite clear that we are not at the end of the road of the mergers or takeovers of exchanges in Europe.’Return to the Financial Director website

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