It was a hostile bid from Sweden, of all places. Upstart OM Technology Group, owner of the tiny Stockholm exchange, tried to seize control of the London exchange for a mere 800 million. London was taken aback. The oldest and perhaps crustiest exchange in Europe was soon rife with rumors. There was talk of a new merger deal with Frankfurt (which collapsed last week); a competing bid from Nasdaq; a defensive merger of the LSE and Euronext, an emerging alliance of French, Belgian and Dutch exchanges. By last week the future of the LSE was still very much in doubt. Not only had the Swedes launched the first hostile attack ever on a national stock exchange, they had also exposed a simple fact of global life today: it’s not only your stocks that are in play, it’s your stock market, too.
This may take some getting used to. For those who imagine that the London Stock Exchange is a sister to institutions like its City neighbor, the national Bank of England, it’s time to think again. Whatever its august reputation, the LSE has never been a public institution. And now its roots as a gentlemanly cartel of British traders are buried in history, alongside the traders’ three-hour lunches and bowler hats. After the “Big Bang” financial reforms of 1986 forced the exchange to admit foreign-owned firms, Americans from investment banks like Merrill Lynch and Goldman Sachs rushed in with a new ethos. “Sentiment is now out of the window,” says David Kynaston, a historian of the City of London. “What matters is what delivers.”
The outsiders pushed open the door even wider. In March the LSE voted to ditch its clubby old constitution and create a company with shares for sale. The aim was to speed up the notoriously slow LSE decision making, and make it easier to merge into a single European exchange. Of course, a continentwide market would make it easier to cut cross-border superdeals that are hugely profitable for investment banks. But by creating public shares in the LSE, the exchange’s members also cleared the way for a hostile bid.
The Swedes were ready. As early as 1992, the Stockholm exchange had transformed itself into a public company, a move that allowed the OM group’s takeover six years later. Others have adopted the same strategy. Both the Hong Kong and Australian exchanges now trade in their own shares. In the City of London, the Big Bang had spawned so many foreign buyouts of banks and brokerages that even Lloyd’s was not really of London anymore. Locals started talking about “the Wimbledon effect”: the British still provide the court, but the top players are outsiders.
Now the arena is for sale, too. The Swedes see in the LSE what any hostile raider sees: the chance to buy an underperforming brand and make it more profitable. Last year the LSE racked up profits of 48.5 million on turnover of £171 million. Most of the money came from membership fees, dealing charges and selling data generated by the market, but most analysts still believe that the exchange could be a lot more profitable. “It is not very clear what the exchange has been doing for the last 10 years,” says Narayan Naik, an expert on exchanges at the London Business School. “Since Big Bang it’s been resting on its laurels.”
The old club is not much missed. “An exchange is really just a box with some wires and razzmatazz attached,” says Brian Mairs of the Association of Private Client Investment Managers and Stockbrokers. “It is just to do with bringing together buyers and sellers. Location is irrelevant.” And the small investor has little to fear from foreign raiders more interested in profits than keeping watch on the market. The government’s Financial Services Authority–not the exchange–now looks after the “public-interest” side of regulation. Brokers certainly aren’t worried. “To be brutally frank, I don’t care where my trades are executed so long as there is good regulation and operating costs are low,” says Matthew Orr of broker Killik & Co. “I don’t mind whether it’s in India or outer space.” Still, one can’t help but wonder what’s up for sale next–Big Ben?
