Merging The London And Frankfurt Exchanges: If At First You Fail...

They may finally merge into one bourse

`Surrender!" blared London's Sunday Times, summing up the popular British take on a possible merger between Frankfurt's Deutsche Borse and the London Stock Exchange. Meanwhile, German politicians fretted that such a deal might prompt an exodus of financial professionals to London.

But this is not a battle of nations, even if Frankfurt proves to be the dominant partner in a merger of Europe's two biggest bourses. "This is far more about technology than location," says Paul Arlman, secretary general of the Federation of European Stock Exchanges. These days, even the mighty LSE has to worry about some upstart online trading system eating its lunch.

By combining London's big listings with Frankfurt's technology and marketing knowhow--and perhaps linking with Nasdaq--the two hope to create the premier platform for European securities trading. They tried in 1998, but failed. If London Chairman Don Cruickshank and Deutsche Borse CEO Werner G. Seifert can resolve tricky issues, from nationalism to personal pride, they just might succeed this time. An announcement could come before May 4.

WARNING. The pressure to reach agreement is intense. Banks, investors, and companies want a more efficient system. They complain that some trades cost 10 times as much in Europe as in the U.S. Deutsche Bank even took a stake in Tradepoint, a London-based electronic exchange, last year. Considering that the bank is the largest shareholder in Deutsche Borse, the message is clear: Shape up.

On paper, London and Frankfurt make powerful partners. Their combined trading volume of more than $1 trillion in the first quarter is triple that of Euronext, the Paris-led alliance with Amsterdam and Brussels. The merged exchange would be based in London, Europe's center of financial expertise. And it would likely use Frankfurt's Xetra electronic trading system, which may become the European standard.

The two bourses complement each other in other ways. Frankfurt's Neuer Markt, a unit of Deutsche Borse, handles a technology initial public offering almost every day. And Frankfurt dominates world futures trading through Eurex, an electronic trading system it operates with the Swiss. London's strength is that it's international. Half of its trading volume is in non-British companies, compared to just 16% in Frankfurt.

A merged exchange would certainly threaten competitors, but it may not force them out of business. Euronext, run by the well-regarded Jean-Francois Theodore, is doing its best to mount a challenge. So far, independent electronic trading platforms such as Tradepoint haven't stolen huge market share. But with enough liquidity they could.

Seifert is likely to become CEO of the new exchange; a Londoner, probably Cruickshank, would serve as chairman. Seifert, a 50-year-old Swiss native, tends to be abrasive and confrontational. But he gets much of the credit for transforming Deutsche Borse.

Now, he faces different challenges. For example, as a concession to British pride the deal may exclude Deutsche Borse's clearing and settlement operation, Clearstream. The unit boosts Frankfurt's value so much that no deal including it could be dressed up as a merger of equals. But without the operation, it will be harder to deliver savings to customers.

If Seifert makes the deal work, he will push to deepen ties between Eurex and the Chicago Board of Trade. And he may try to sell Nasdaq a stake in the merged company. He will probably take the new exchange public. Despite their fears, London and Frankfurt might both come out ahead.

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