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Euronext N.V.: The Fight for LIFFE

Euronext N.V.: The Fight for LIFFE. The Fight for LIFFE. Late August 2001: LIFFE*, the prestigious British derivatives exchange, is up for auction.

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Euronext N.V.: The Fight for LIFFE

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  1. Euronext N.V.:The Fight for LIFFE

  2. The Fight for LIFFE Late August 2001: LIFFE*, the prestigious British derivatives exchange, is up for auction. For Euronext - a newly minted combination of the former Paris, Amsterdam and Brussels stock exchanges – this could be a perfect opportunity to position itself as one of the consolidators in the industry, rather than waiting to become one of the consolidatees. But the prize will not come easily. In the battle for LIFFE, Euronext will be up against the two biggest and most powerful stock exchanges in Europe, and one of them will be fighting on home ground…. * London International Financial Futures and Options Exchange

  3. Euronext’s Challenge How can Euronext communications chief Thierry Barthez and CEO Jean-François Théodore succeed where others have failed, in persuading a London exchange to sell out to a little-known foreign buyer? (for an idea of the challenge this represents: imagine a French-controlled company being allowed to buy NASDAQ or the Chicago Mercantile Exchange!)

  4. What is an Exchange? • A marketplace, physical or virtual, where participants trade one or more types of financial products, such as: • Stocks and stock indices (known as “cash” markets) • Derivatives e.g. options, warrants, futures • Commodities e.g. metals, oil, cocoa • Currencies

  5. What is Euronext? • A cross-border stock and derivatives exchange • Formed in 2000 from merger of Paris, Amsterdam and Brussels exchanges (the first ever successful merger in the industry) • Became a public company in July 2001 IPO

  6. The Battlefield • What kind of industry is this? • Highly fragmented into regulated local monopoly markets (18+ national stock exchanges in Europe) • Most exchanges owned/operated as mutual-co-operatives • Customers are financial institutions, not the general public • What dynamics are operating within it? • Global market forces and financial institutions pushing for larger pools of capital, more liquidity, lower trading costs, ease of cross border transactions • Political interests seeking to preserve national exchanges

  7. Signs of Change? • Changes in ownership status and structure • Deutsche Börse (DBAG), London Stock Exchange (LSE) & Euronext become public listed companies in 2001 • Beginnings of merger activity: • Euronext born in 2000 from three-way merger, creating #3 exchange in Europe. • DBAG attempts, unsuccessfully, to merge with the LSE in 2000, as does OM, operator of the Stockholm Stock Exchange.

  8. The Battlefield How the combatants compare 2001 total revenues Derivatives* Stocks* Sources: company annual reports Key Member of European Union (EU) Member of EU but not in European single currency Exchange Market position in Europe, by volumes traded * + 2000 revenues

  9. Why Does Euronext Need LIFFE? • Adds scale and scope: • Complementary products • Presence in London – a key world financial center • Technology • Access to LIFFE’s CONNECT trading system • Credibility • A successful LIFFE acquisition would position Euronext to make further mergers/acquisitions elsewhere in Europe. • Losing will put it a distant third to DBAG and LSE.

  10. How the Rivals Line Up • Cash from IPO • Can switch to LIFFE CONNECT trading system • Can offer LIFFE traders access to Euro products • Could give LIFFE self-governance from London Strengths • Same language, location and currency as LIFFE • Same regulator • Complementary products (LIFFE offers options on LSE stocks) • Cash from IPO • Can offer LIFFE traders access to Euro derivatives • Probably strongest exchange overall in Europe • EU anti-trust issues (#1 already in European derivatives market) • Recent failed merger with LSE • Cultural/political issues • Different regulators • Did not raise spare cash from IPO – will need to make cash & shares offer • Faces tough choice: keep own trading system or switch to LIFFE CONNECT • Likely to need full integration to achieve synergies Weaknesses • Cultural/political issues • Different regulators • Still facing integration issues from 2000 merger • Still new on the scene

  11. Who Will Decide? LIFFE MANAGEMENT LIFFE Board (consisting of its major shareholders, most of whom are also customers) choose which bid to accept • CEO Freedberg, Chairman Williamson • Advises board on strengths of business cases submitted by bidders • Major shareholders, most of whom are also LIFFE customers • Votes on which bid to accept • UK Financial Services Authority & the European Competition Commission • Must approve the merger WHO? HOW?

  12. How can Euronext Win?

  13. Euronext’s Strategy For Battle • Focus on customers • LIFFE shareholders are also its customers: their long term livelihood is at stake. Euronext stressed its commitment to lowering trading costs, increasing liquidity and keeping existing technology. • Build trust • Consistent words and deeds: consistency between business case and Euronext’s corporate strategy: consistent in all communications with LIFFE. • Exemplary behavior during auction: no leaking bids or negotiating through press. • Be open, but keep low profile • Hard to win hearts of public, and probably not necessary. • Many in UK still very “Euro-sceptic”: sensitivity required when talking about long term goals for European integration. • Be mindful of long term objectives • UK government may be unlikely to intervene, but aggressive or insensitive approach might harm political chances for later acquisitions elsewhere in Europe.

  14. Tactics: a Two Phase Campaign • Phase one (during auction): • Sell acquisition business case to LIFFE management & shareholders (focusing on customer benefits) • Limited media interviews; no public discussion of bid • Use English native speakers to help draft board presentation, key messages and press releases • Phase two (if bid is successful): • With assistance of LIFFE management, inform and educate UK politicians and regulators; European Competition Commission • Educate LIFFE and Euronext employees on acquisition rationale, benefits for customers • Sell acquisition business case to Euronext shareholders (focus on long term value and customer benefits)

  15. How the Auction Played Out 2000 2001 Apr Sep Nov Feb July Aug 5 LSE IPO Euronext IPO Formation of Euronext announced: LSE refuses to join DBAG merger with LSE fails OM bid for LSE fails DBAG IPO late Aug Sep 27 Sep 29 Oct 25 Oct 28 Oct 29 LIFFE rumors begin LIFFE says it has received a “number of approaches” Final bidder presentations to LIFFE board: LSE reportedly bids £18.50 a share LIFFE reportedly rejects last minute LSE bid of £19 a share LSE says it plans to bid between £12-£15 LIFFE and Euronext announce an agreed deal at £18.25 a share Sources: Company press releases; The Independent, 10/30/2001.

  16. Battle Lessons • Strategy is only as good as its articulation • Customers are the ultimate decision-makers • In every battle, never forget the objectives of the war (i.e., manage for tomorrow) • Consistency of word and deed is essential in building trust and reputation • You can never understand too much about the environment in which you operate • Cash is not always king...

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