The Battle for the Bourses

Two hedge funds are pressuring Paris-based Euronext to hook up with either the Deutsche Borse or the New York Stock Exchange -- or else

Chances are, you have never heard of them. But two activist hedge funds, New York-based Atticus Capital and London-based TCI, are helping to shape the future of the world's biggest stock exchanges. Last year they led a shareholder revolt that derailed a bid by Germany's Deutsche Borse for the London Stock Exchange. Now, they have emerged as key players in the maneuvering that led to the New York Stock Exchange's (NYX) May 22 bid for Paris-based stock exchange Euronext, for $10.2 billion.

Atticus and TCI, which together control almost 20% of Euronext shares as well as substantial stakes in the NYSE and Deutsche Borse, have been pressing the Paris-based mart to link up with either the New York or the German exchange. Last week, Atticus warned it would seek removal of Euronext's top management at the exchange's annual meeting on May 23 if it didn't offer a tie-up proposal to shareholders by then.

Spokesmen for Atticus and TCI decline to discuss their role in the talks. But the pressure they applied "was clearly the impetus" for the NYSE's proposal, an insider at one of the exchanges says. The NYSE bid, which would create the world's biggest exchange with a market value of $21 billion, was assembled over the weekend and unveiled on the eve of the Euronext shareholder meeting. Deutsche Borse, which has held off-again, on-again talks with Euronext for months, has offered a competing merger proposal. Until the NYSE came forward with its bid, both Atticus and TCI had expressed support for the Deutsche Borse proposal. Neither has spoken publicly since the NYSE announcement.


 Who are Atticus and TCI, and what do they want? The short answer: They are classic hedge funds, looking for the deal that will give their investors the best return. Atticus, which has investments totaling $9.7 billion according to recent Securities & Exchange Commission filings, has amassed a stake of about 9% in Euronext, plus about 6% each of the NYSE and Deutsche Borse. TCI, which had $3 billion in assets under management as of last year, holds about 10% each of Euronext and Deutsche Borse. "Their role is not any different from the role they play in other industries. They are rational capitalists looking for a rational outcome," says Tim Plews, a partner in the London law firm of Clifford Chance, who specializes in financial markets.

Atticus and TCI both have a reputation for playing tough. Just ask Werner Seifert, the former Deutsche Borse chief executive, who was ousted a year ago after the two hedge funds led a shareholder revolt to ditch the LSE merger that Seifert favored. Atticus was founded by former Harvard hockey star Timothy Barakett and Nathaniel Rothschild, a scion of the European banking dynasty. TCI, whose formal name is The Children's Investment Fund Management, is run by Christopher Hohn, a former money manager for Perry Capital in London. Its unique feature: 0.5% of the fund's assets under management are put into a charitable fund headed by Hohn's wife.

If a Euronext-NYSE deal goes through, the global stock exchanges will be transformed more than ever. NYSE chief John Thain, who would head the combined exchange, would get two things he badly wants: greater international exposure, and a futures and options market. At the same time, the deal would give Paris the best chance of remaining a big financial center.


  Under the Deutsche Borse proposal, the headquarters of the merged exchange would move to Frankfurt, dimming the Gallic star. Euronext chief Jean-François Théodore would be Thain’s No. 2 in the proposed NYSE-Euronext linkup.

On the downside, the NYSE would be taking over a larger company -- often a challenge to management -- while Thain is still coping with the wrinkles of the NYSE merger last year with Archipelago, an electronic trading system.

With the NYSE offering cash and shares, it may have an edge over Deutsche Borse, which is reportedly looking to make an all-stock offer. Any deal between the NYSE and one of the European players would open up a regulatory can of worms. But at this stage, it looks as if hedge funds and institutional shareholders might just want a deal no matter what.

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