A Swedish Surprise

OM's bid catches the attack on the London Stock Exchange off guard

With his neatly combed blond hair and youthful smile, 39-year-old Per E. Larsson does not look the part of the steely-eyed corporate raider. Yet the president and chief executive of Sweden's OM Group, a financial technology conglomerate that owns the Stockholm Stock Exchange, has just shown how deceiving appearances can be. With OM's $1.19 billion hostile takeover bid for the London Stock Exchange, unveiled on Aug. 29, Larsson has managed to unnerve executives and institutional customers at nearly every one of Europe's 20 or so bourses.

OM's offer has disrupted the LSE's controversial plans for a merger of equals with Frankfurt-based Deutsche Borse, a move intended to create the long-awaited pan-European stock exchange. And it will almost certainly start a bidding war for the LSE, Europe's largest and most liquid securities exchange.

PROFOUND QUESTIONS. Most important, Larsson's daring step could shatter the comfortable assumptions of most stock-market strategists that the best way to set up a Europewide trading system is by merging national exchanges. "What's at stake is the shape of the coming pan-European market," says Brian Winterflood, chief executive of London-based Winterflood Securities Ltd. "OM's bid raises profound questions about that."

Larsson's company, which now accounts for just 5% of European equity trading, probably won't win control of the LSE. Indeed, LSE officials quickly rejected his initial bid. But Larsson's vision of how to create an efficient exchange could still triumph. "Traditionalists claim that the biggest wins," he says. "We believe in a more modern type of wisdom: The fastest wins."

Brokers credit OM with developing one of the world's most transparent, efficient, and inexpensive trading systems. And its most valuable asset may be Jiway, an electronic-communication network, or ECN, of the kind that is seen as the real future of European cross-border trading.

ECNs have already snatched a quarter of Nasdaq's over-the-counter trading in the U.S., and there's no reason why Europe would be any different. When Jiway starts up in November, it will list 6,000 stocks from across Europe and the U.S. "Given that," says the head of a Frankfurt-based mutual fund, "merging exchanges isn't necessarily the best way to attract liquidity."

LSE Chairman Don Cruickshank and DB Chief Executive Werner Seifert disagree. They say their new exchange, iX, would satisfy the big institutional investors' yearning for a broad trading platform and generate the economies of scale needed for pan-European trading.

Larsson counters that combining the LSE's liquid market and brand name with OM's state-of-the-art technology and commercial drive would create Europe's most nimble exchange by far.

Many of Europe's exchanges, though, are going for size, not speed. In April, the Paris, Amsterdam, and Brussels bourses decided to join forces to form Euronext. A month later, the LSE and DB announced their deal. In July, when Nasdaq said it might join the alliance, the battle for Europe seemed over.

VOTE ON HOLD. But size, it turns out, isn't everything. Many British brokers oppose the merger, contending that dealing costs would still be too high and that many regulatory issues haven't been settled. By late August, it looked as though LSE shareholders would vote against the plan at a Sept. 14 session.

That meeting has now been delayed, perhaps canceled. DB Chairman (and Deutsche Bank CEO) Rolf E. Breuer says that Frankfurt may renegotiate. More likely, it will launch a friendly takeover bid for the LSE. But that may not be well received. London brokers fear that Seifert, known for being abrasive, would ride roughshod over the LSE.

A takeover by OM would not be any more palatable. Actually, a merger doesn't seem crucial anymore. "OM has inspired us to ask whether we really need anyone," says Winterflood. Either way, Per Larsson's audacious bid sends a signal that the game is far from over.

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