Xavier Rolet Wrestles Technology at LSE as Rivals Steal M&A Show
Xavier Rolet, the chief executive officer of London Stock Exchange Group Plc, has started overhauling the 209-year-old bourse’s technology, stemmed a slide in market share and helped spur a rebound in the stock -- all in less than two years on the job.
He has also seen his $3.15 billion takeover bid for Toronto Stock Exchange owner TMX Group Inc. upstaged by Deutsche Boerse AG and NYSE Euronext’s merger. London’s main equities venue, which brought a new system online Feb. 14 after more than three months of delays, experienced a four-hour trading halt on Feb. 25. Three days earlier, a data malfunction shut down LSE’s Borsa Italiana for 6 1/2 hours just as violence in Libya sent global markets tumbling.
Rolet, 51, is struggling to compete at a time when global markets are consolidating by modernizing systems and expanding into North America. While LSE’s shares almost doubled since his appointment was announced Feb. 13, 2009, the company’s annual sales are forecast to rise 2.9 percent this year after climbing an average of 25 percent from fiscal 2005 to 2010, data compiled by Bloomberg show.
“He has substantial challenges,” said Jeremy Isaacs, founder of JRJ Group who was head of Lehman Brothers Holdings Inc.’s European and Asian business and has been friends with Rolet since the 1990s. “TMX is a good deal, and if it wasn’t for NYSE-Deutsche Boerse, it would be viewed as groundbreaking. It’s been usurped -- like buying a new car and putting it on your drive, then your neighbor buys a Rolls Royce.”
Victoria Brough, a spokeswoman for LSE, said Rolet wasn’t immediately available to comment. LSE shares rose 0.8 percent to 900 pence at the 4:30 p.m. close in London today.
Rolet, who earned a master’s degree in business administration from New York’s Columbia University in 1983, joined LSE in May 2009 after almost a decade at Lehman Brothers, where his last job was head of its French business. London-based LSE, led by Clara Furse for eight years, was confronting unprecedented competition from electronic exchanges after regulators threw open markets to competition in 2007.
The company’s share of equity trading for FTSE 100 Index stocks fell as low as 52 percent in 2010 from about 75 percent two years earlier as customers shunned higher fees and an aging trading system that trailed rivals in speed and capacity. The level is about 55 percent now, according to data compiled by Bats Global Markets in Kansas City, New Jersey.
On his arrival at LSE’s Paternoster Square headquarters, Rolet passed up the seventh-floor executive suite to be closer to staff. His glass-walled office on the second floor is decorated with photos of the 2007 Lisbon-Dakar Rally, a desert car race that he completed for charity, and shots of his three children and wife sailing.
The executive, who restored and modernized a medieval priory and vineyard in Provence, France, got to work fixing LSE’s technology. He took a majority stake in Turquoise, an alternative platform owned by his biggest customers, and restructured fees to stem the loss of market share.
“Xavier’s always been very aggressive,” said Thomas Caldwell, chief executive officer of Caldwell Securities Ltd. in Toronto, which with its affiliates oversees about C$1 billion including TMX and LSE shares. “It’s putting that aggressiveness into practice that’s sometimes a challenge. He’s in a little bit of a siege situation in London because you have these monster competitors.”
In September 2009 Rolet announced the acquisition of MillenniumIT, a Sri Lankan technology services company, to replace LSE’s old equities platform, TradElect. After the exchange moved Turquoise to Millennium on Oct. 4, the system malfunctioned on its first two days of operation.
LSE’s main market was scheduled to move to the system on Nov. 15. On Nov. 2, Turquoise again halted dealing for about two hours, citing a technical problem. Later that day, LSE postponed the bigger network’s move, saying there may have been “suspicious circumstances” behind the Turquoise stoppage. LSE now blames human error for the glitch. It transferred the main market to Millennium on Feb. 14.
On Feb. 25, London markets paused for more than four hours due to what the exchange called a “market data issue.” On Feb. 22, LSE’s Milan bourse was unable to open the day after Italy’s benchmark FTSE MIB Index plunged to an eight-month low amid concern about unrest in Libya. A problem with a system that sends data to vendors led to trading on Borsa Italiana starting two hours before the close.
“Investors won’t remember necessarily that Borsa Italiana went down, they will remember that the LSE Group system went down -- that’s the problem,” said Peter Randall, chief executive officer of Equiduct Systems Ltd., which is seeking to take LSE’s business from retail brokers. Fixing the LSE is “a big task and a thankless task,” he said. Randall previously ran London-based Chi-X Europe Ltd., which he built into LSE’s biggest rival.
The Google Inc. Internet search engine blocked visitors to LSE’s website this weekend because an advertisement on the page was flagged as a possible source of computer viruses, LSE spokesman Alastair Fairbrother said today. The exchange took down the ad yesterday and Google is removing the website from its blacklist, he said.
Rolet was born to parents in the French military and grew up in Sarcelles, a working-class region of northern Paris. He served in the French Air Force, as a second lieutenant and instructor, before enrolling at Columbia.
He started in finance a year later, working for Robert Rubin at Goldman Sachs in New York. Duncan Niederauer, now CEO of NYSE Euronext, was a colleague. He moved to London in 1990, promoted to co-head of European equity sales and trading.
In 1994 he joined Credit Suisse First Boston as global head of European equities. CSFB employed Brady Dougan, now CEO of Credit Suisse Group AG, and derivatives pioneer Allen Wheat.
Rolet next worked for Dresdner Kleinwort Benson as global head of risk and trading before switching to Lehman Brothers in 2000, where as CEO of the bank’s French business he was responsible for winding up the unit following the September 2008 bankruptcy that marked the height of the financial crisis.
“He is a fixer,” said Isaacs, who worked with Rolet at Goldman Sachs before bringing him to Lehman. “Also a person with enormous intellect. I can’t think of anyone who’s more qualified to sort LSE out -- if sorting it out means making the LSE a globally competitive platform, giving it a voice in the global debate and positioning it in the M&A game.”
LSE has sought sources of revenue away from stock trading. The exchange, which started in the coffee shops of 17th century London, was the first European market targeted by alternative trading platforms since deregulation in 2007. Even with TMX, analysts say the company lacks a clear strategy to tap the more profitable businesses of its competitors.
“LSE is not paying a premium for TMX and the deal is accretive from year one,” Donald Fandetti and Nese Guner, analysts at Citigroup Inc., wrote in a Feb. 15 note to investors. “Negative is that the deal does not provide the LSE with meaningful scale in derivatives or post-trade services.”
A combined NYSE and Deutsche Boerse will account for about 93 percent of listed derivatives in Europe, according to data compiled by Citigroup. The expanded company will also own Clearstream, the region’s second-largest securities-settlement company, as well as Eurex Clearing.
‘Able and Aggressive’
LSE is “in a more vulnerable position now than when he took over, though that’s not because of him,” said Niki Beattie, a consultant to exchanges who knows Rolet from her years as Merrill Lynch & Co.’s managing director of market structure. “He is able and aggressive. But the landscape around LSE is changing faster than they can. Being trumped by NYSE and Deutsche Boerse shows that. He’s a capable guy but his hands are relatively tied.”
Rolet’s predecessor Furse fought off five takeover offers in two years, including bids from Deutsche Boerse, Euronext and New York-based Nasdaq OMX Group Inc., before buying the operator of the Milan stock exchange in 2007. Furse also tried and failed to buy Liffe, the U.K. derivatives exchange that is now part of NYSE Euronext.
“Losing Liffe was a critical defining moment in the history of the LSE,” said Beattie. “Then they didn’t do anything strategic after that. There was no strong move to get into derivatives.”
LSE shares gained 83 percent since Feb. 13, 2009, the day Rolet was named CEO, beating the 49 percent rally in the benchmark Stoxx Europe 600 Index. The stock remains 55 percent below its all-time high of 1,979 pence reached in December 2007, data compiled by Bloomberg show.
TMX and LSE have a combined market value of 4.32 billion pounds ($6.96 billion), based on closing prices on Feb. 25. That compares with $24.6 billion for a combined NYSE and Deutsche Boerse.
“He’s very aware of the unstoppable consolidation trend among exchanges,” said Bruce Weber, professor of finance at the London Business School, who met Rolet about two years ago and invited him to be a guest lecturer. “He is positioning London to survive.”
To contact the reporters on this story: Nandini Sukumar in London at firstname.lastname@example.org;