Fair exchange?

Experts agree that the London stock market would have had to look for a merger sooner or later. But is the proposed marriage with Frankfurt’s Deutsche Borse good news for UK manufacturers, or will it just make life even more difficult for neglected engineering stocks? ADRIENNE MARGOLIS reports. Later this summer, shareholders in the London […]

Experts agree that the London stock market would have had to look for a merger sooner or later. But is the proposed marriage with Frankfurt’s Deutsche Borse good news for UK manufacturers, or will it just make life even more difficult for neglected engineering stocks? ADRIENNE MARGOLIS reports.

Later this summer, shareholders in the London stock exchange will be asked to vote on plans to merge with Frankfurt’s Deutsche Borse, to create a new joint venture exchange with the US Nasdaq, to be called iX. The proposals are surrounded by controversy. Supporters in the financial sector argue that a move like this is inevitable, because of the global nature of share trading. But sceptics in the business world warn it could put the majority of British companies at a disadvantage.

Engineering companies could be particularly at risk. The carve-up of work between the two exchanges could leave London focusing on the European blue-chips, while Frankfurt concentrates on the faster-growing high-tech stocks. Many engineering groups, which are either out of favour or simply off the radar because of their depressed market capitalisation, could find it even more difficult to attract capital.

The move has invited criticism from business leaders, most notably George Cox, director general of the Institute of Directors, who branded the move a `takeover’ of the London stock exchange by the German market.

Cox, who is also an independent director of the futures exchange Liffe (which is a rival of Deutsche Borse’s futures arm) said the merger proposals could be potentially more damaging to the UK than any of the problems facing manufacturers from the high pound.

The problem, though, is far from clear cut. Merging the two markets will create greater liquidity of funds, which is a good thing – more investors will have the chance too consider investment in an even greater range of companies. But if the merge does not take place (and this is the line being pushed by the two parties involved) London risks being sidelined as a result of the urge to merge within Europe – after all, Paris, Brussels and Amsterdam had already announced plans to merge before the iX idea was made public.

There is also a sense that Nasdaq’s entry to Europe should be somehow contained by partnering existing European bourses. The US rival chose the European techMARK’s launch day at the end of last year to announce it was coming to Europe. Critics had argued that techMARK might be one high-tech market too many. Now, the London stock exchange admits that `critical mass’ is needed in both the high-tech markets and other sectors, to keep the world investment community happy.

`We have been wanting a presence in Europe, but it is part of a bigger vision’, Nasdaq spokeswoman Maggie Kelley says. `We are talking about a global vision – linking Asia, Europe and America.’ This means that if the Nasdaq/European joint venture goes ahead, it will eventually link up with other Nasdaq markets around the world, to create a global, 24-hours-a-day trading platform for high growth stocks.

For the main exchanges, too, the plan does not stop at linking London and Frankfurt. If approved by all sides, the new exchange will be running by the autumn. Talks are already under way for Milan and Madrid to then join iX.

The main impetus for these mergers is that there are too many stock markets, and they are not all viable. Stock exchanges worldwide are looking at whether they can survive on their own, and in Europe, consolidation has already begun.

The urge to merge: who gains?

The London stock exchange and Deutsche Borse argue that the merger will make iX Europe’s leading exchange in terms of volume and value of equity trading. Around 45% of Europe’s top 300 companies already have their primary listing on one of the two exchanges.

The joint venture with Nasdaq will mean the new exchange will trade around 80% of the continent’s high-tech stocks.

There have been objections from some UK business leaders over the proposal that this market will be incorporated in England and managed from London, but will operate in Frankfurt under German regulation and carry the `Nasdaq’ brand.

Unsurprisingly, the backers of the merged market told The Engineer that it will be good news for manufacturing companies in the UK, and elsewhere in Europe.

`Companies seeking finance will be able to attract investors from all over Europe,’ one analyst explains. `For UK engineering and manufacturing firms, they will not just be competing for investment at home.’

There has been speculation that only Europe’s blue chip companies or high-tech companies will gain from the changes. But supporters of the merger say that while top companies will undoubtedly benefit, it does not mean others will lose out.

`Regardless of size, all companies will be on the same trading platform,’ a London stock exchange spokesman says. `It means their shares are tradeable in wider circles, and that more investors will have access to purchasing their shares. Companies will all have greater visibility.’

Some analysts think this doesn’t ring true – the more companies trading, the argument goes, the more analysts and fund managers will be forced to ignore a vast tract of them.

Another fear is that the exchange will price in euros, forcing UK companies to adopt the currency for reporting and accounting purposes. The stock exchange insists that current arrangements will not change. If companies now deal exclusively in sterling, this will continue.

It is not clear, however, that this message is getting across. John Pierce, chief executive of Cisco, which represents smaller quoted companies, has had a flood of enquiries about the implications of the proposal for deals to be quoted in euros, and on the issue of who will govern the merged market.

Pierce feels his members have been left in the dark. `We have a lot of questions and we have not been able to get any answers,’ he says.

Many smaller companies believe that the sole impetus for the merger is coming from big financial institutions, and that little attention has been paid to the views of companies quoted on the exchange. `We represent the largest body of companies which makes up the stock exchange’s customers,’ Pierce points out. `But London, Frankfurt and Nasdaq now seem to be forming a cosy little cartel.’

There is no doubt that concern exists among smaller listed engineering firms, which already felt themselves neglected and considered unfashionable in City circles. A senior director of a UK engineering company says: `It’s the way the world is going at the moment: there are mergers in every direction.

`Small-cap engineering companies like ourselves are getting smaller by the minute in terms of our importance on the London stock exchange. After the merger we’ll be even smaller minnows in a bigger pond. So from our point of view it’s not a good thing. It might not be so bad for the bigger engineers.

`Potentially we face less interest in investing in us, with fewer brokers following us and less interest from the investing public. But there’s not a great deal we can do about it. Depending on which market they’re in, companies will have to try to grow organically or by acquisition, or de-list, though some will try to carry on as they are.’

However, the London stock exchange predicts that even smaller companies could gain from the reduction in costs that the new market could create. Settlement costs Europe-wide could be lower: `Ultimately, for smaller companies as well as larger ones, a merged market will mean greater access, and greater efficiencies which can be passed on.’

Whatever people think of the merits of this particular proposal most experts agree that for the London stock exchange, a merger of some type is inevitable. As Graham Spooner, a director of Classic Fund Management points out: `The stock exchange has had its role redefined. It is no longer a gatekeeper or regulator. It has to be more commercial. To be effective, it has to have critical mass.’

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