Battle of Europe's Bourses

It's Frankfurt vs. Paris for top dog in the euro zone

It has been a rough fall for Werner G. Seifert. The CEO of Frankfurt's Deutsche Börse, the main exchange of Germany, was the architect behind Neuer Markt, the tech-rich market for growth stocks that sucked in billions of dollars during the heady days of the Internet boom. This go-go market was subsequently hit by a series of share-trading scandals and mauled far more brutally than its rivals when the New Economy bubble burst. On Sept. 26, Seifert finally put the Neuer Markt out of its misery, announcing that it would be replaced by a new "market segment" to be called "Prime Standard."

Ouch. One executive, however, no doubt enjoyed Seifert's pain: Jean-François Théodore, chairman of the Paris-headquartered stock exchange Euronext, formed in 2000 by the merger of the Paris, Brussels, and Amsterdam bourses. Théodore and Seifert are each determined that his exchange will become the biggest and most profitable securities market. They are constantly scheming behind the scenes to best exploit the consolidation that experts say is on the way. Europe, after all, still boasts more than 20 exchanges. "But in the long term, there is probably room for just two or three," says the CEO of one of Germany's small regional bourses.

After the death of the Neuer Markt, Seifert does not want to lose the next round. He is driving hard to attract new listings, roll out new products, exploit synergies among DB's various operations, and cut costs to the bone. One prize that both he and Théodore covet: the London Stock Exchange, Europe's most international market and home to its most prestigious multinational companies. Seifert already tried once to merge with the LSE, but the deal fell apart.

Neither CEO will say if or when he plans to make a move on London. Théodore points out that the LSE is strong enough to go it alone and "is not being forced to find an agreement at all costs." Seifert refuses to speculate publicly about merging with London. But a merger between DB, with its broad range of services, and the LSE, with its huge cash market, would make good business sense.

The battle to dominate Europe's exchanges comes just as the European Commission is putting the final touches on plans, to be unveiled in November, that will harmonize many of the national regulations that make it costly and complicated for investors to trade securities across borders. And they will allow exchanges regulated in one country to operate across the EU. "Creating a more or less equal playing field will further increase competition," says Seifert. That should benefit larger, more liquid exchanges like DB, Euronext, and the LSE.

Meanwhile, sagging share prices and a dearth of initial public offerings have aggravated the intense rivalry, since both DB and Euronext--and for that matter, the LSE--are now public companies under pressure to maximize profits. Although their shares are down for the year, analysts rate both companies highly. DB forecasts profits of $350 million this year on revenues of $1.3 billion. Euronext is slated to earn $271 million on revenues of $962 million.

Théodore and Seifert have been gunning for each other since 2000, when DB negotiated its ill-starred merger with the LSE. Even before that deal fell apart, Théodore had retaliated with his own bold merger between Paris, Brussels, and Amsterdam. Then, in January, the Frenchman acquired the London International Financial Futures & Options Exchange (LIFFE), outmaneuvering the LSE on its own turf.

As a result, when it comes to trading in futures and other derivatives, Euronext is now a match for DB, which owns 80% of Eurex, the world's largest futures exchange. That's important, because the derivatives business is growing fast. "Concerns over credit risks and growing demand for hedging products mean that more and more derivatives trading is being done on bourses," says Huw van Steenis, who follows stock exchanges for Morgan Stanley in London. "We're talking double-digit growth. Futures and options trading is now a major battleground between the exchanges."

Théodore, a former senior official at the French Treasury, added to his stable of stock exchanges when he brought Portugal's stock market into the Euronext fold early this year. Seifert, a 53-year-old Swiss national and former McKinsey & Co. consultant with a degree in insurance, banking, and organizational theory, made his next move in April, when DB consolidated its hold over the clearing and settlement firm Clearstream International. Clearing companies arrange for the transfer of stock and the money that pays for it among buyers and sellers. By buying Clearstream, Seifert can exploit synergies among his operations, and keep costs to a minimum.

Then, on July 1, DB's Eurex moved deep into Euronext territory when it expanded its range of Dutch equity options and introduced technical changes that made Eurex more attractive to Dutch investors. It has since picked up 7% of the lucrative business.

So who's winning? Right now, it's cheaper to clear a trade on DB than Euronext. And although its core German equity market is at a low ebb, DB is doing well when it comes to derivatives trading and settling fixed-income deals. DB has lower costs and a higher return on equity than Euronext. Analysts predict Euronext's ROE will be around 10% this year. DB's should come in around 14%.

But don't count Théodore out. Although Euronext was slower off the mark than DB at cutting costs, Théodore is catching up. And at the end of the day, the most successful exchange will be the one that attracts the most trades, either by offering a more efficient service or adding volume through mergers. That's an area where Théodore--a 56-year-old who graduated from France's elite Ecole Nationale d'Administration--has so far led the field. Observers attribute his success to his consensual approach to decision-making. Critics say that Seifert's abrasiveness contributed to the failure of his planned merger with London.

Théodore, in contrast, offered his Euronext partners generous terms. Not only did he allocate them more of the equity in the merged institution than was warranted by their trading volumes but he also retained senior managers and most of the staff. He used similar tactics to lure LIFFE, paying the $808 million price in cash and guaranteeing that the chairman and CEO would keep their jobs.

Théodore will undoubtedly next launch a charm offensive against the LSE, possession of which could put Euronext or DB in the No. 1 slot for good. The LSE won't comment. "We have a number of interesting options open to us," says a spokesman. One, says Phil Bruce, head of corporate strategy at LSE, is to stay independent. The U.S., he points out, has a single clearing system and one regulatory body but a number of exchanges, "because customers don't want just one." That may be. But it won't stop Seifert and Théodore from scheming to expand their empires.

By David Fairlamb in Paris

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