Euronext N.V.: The Fight for LIFFE

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The Fight for LIFFELate August 2001: LIFFE*, the prestigious British

derivatives exchange, is up for auction.

For Euronext - a newly minted combination of the former Paris, Amsterdam and Brussels stock exchanges – this

could be a perfect opportunity to position itself as one of the consolidators in the industry, rather than waiting to become

one of the consolidatees.

But the prize will not come easily. In the battle for LIFFE, Euronext will be up against the two biggest and most

powerful stock exchanges in Europe, and one of them will be fighting on home ground….

* London International Financial Futures and Options Exchange

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Euronext’s Challenge

How can Euronext communications chief Thierry Barthez and CEO Jean-François

Théodore succeed where others have failed, in persuading a London exchange to sell out

to a little-known foreign buyer?

(for an idea of the challenge this represents: imagine a French-controlled company being

allowed to buy NASDAQ or the Chicago Mercantile Exchange!)

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What is an Exchange?

• A marketplace, physical or virtual, where participants trade one or more types of financial products, such as:– Stocks and stock indices (known as “cash” markets)– Derivatives e.g. options, warrants, futures– Commodities e.g. metals, oil, cocoa – Currencies

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What is Euronext?

• A cross-border stock and derivatives exchange

• Formed in 2000 from merger of Paris, Amsterdam and Brussels exchanges (the first ever successful merger in the industry)

• Became a public company in July 2001 IPO

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The Battlefield• What kind of industry is this?

– Highly fragmented into regulated local monopoly markets (18+ national stock exchanges in Europe)

– Most exchanges owned/operated as mutual-co-operatives

– Customers are financial institutions, not the general public

• What dynamics are operating within it?– Global market forces and financial institutions pushing

for larger pools of capital, more liquidity, lower trading costs, ease of cross border transactions

– Political interests seeking to preserve national exchanges

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Signs of Change?

• Changes in ownership status and structure– Deutsche Börse (DBAG), London Stock

Exchange (LSE) & Euronext become public listed companies in 2001

• Beginnings of merger activity:– Euronext born in 2000 from three-way merger,

creating #3 exchange in Europe.– DBAG attempts, unsuccessfully, to merge

with the LSE in 2000, as does OM, operator of the Stockholm Stock Exchange.

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The Battlefield

LondonDeutsche Börse

Euronext

Lisbon

LondonDeutsche Börse

Euronext

Lisbon

LondonDeutsche Börse

Euronext

Lisbon

LondonDeutsche Börse

Euronext

Lisbon

Member of European Union (EU)

Member of EU but not in European single currency

Exchange

Key

Market position in Europe, by volumes traded*

LIFFE - #3 €144m+

LSE #1 - €315m

Euronext #3 #2 €698m

DBAG #2 #1 €760m

Stock

s*Der

ivativ

es*

2001

tota

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reve

nues

How the combatants compare

2000 revenues+

Sources: company annual reports

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Why Does Euronext Need LIFFE?

• Adds scale and scope:– Complementary products– Presence in London – a key world financial center

• Technology– Access to LIFFE’s CONNECT trading system

• Credibility– A successful LIFFE acquisition would position

Euronext to make further mergers/acquisitions elsewhere in Europe.

– Losing will put it a distant third to DBAG and LSE.

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How the Rivals Line UpS

tren

gth

sW

eakn

esse

s

• Same language, location and currency as LIFFE

• Same regulator

• Complementary products (LIFFE offers options on LSE stocks)

• Did not raise spare cash from IPO – will need to make cash & shares offer

• Faces tough choice: keep own trading system or switch to LIFFE CONNECT

• Likely to need full integration to achieve synergies

• Cash from IPO

• Can switch to LIFFE CONNECT trading system

• Can offer LIFFE traders access to Euro products

• Could give LIFFE self-governance from London

• Cultural/political issues

• Different regulators

• Still facing integration issues from 2000 merger

• Still new on the scene

• Cash from IPO

• Can offer LIFFE traders access to Euro derivatives

• Probably strongest exchange overall in Europe

• EU anti-trust issues (#1 already in European derivatives market)

• Recent failed merger with LSE

• Cultural/political issues

• Different regulators

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Who Will Decide?

LIFFE BOARDLIFFE’S

REGULATORS

• CEO Freedberg, Chairman Williamson

• Advises board on strengths of business cases submitted by bidders

LIFFE Board (consisting of its major shareholders, most of whom are also customers) choose which bid to accept

• UK Financial Services Authority & the European Competition Commission

• Must approve the merger

LIFFE MANAGEMENT

• Major shareholders, most of whom are also LIFFE customers

• Votes on which bid to accept

WHO?

HOW?

How can Euronext Win?

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Euronext’s Strategy For Battle• Focus on customers

– LIFFE shareholders are also its customers: their long term livelihood is at stake. Euronext stressed its commitment to lowering trading costs, increasing liquidity and keeping existing technology.

• Build trust – Consistent words and deeds: consistency between business case

and Euronext’s corporate strategy: consistent in all communications with LIFFE.

– Exemplary behavior during auction: no leaking bids or negotiating through press.

• Be open, but keep low profile– Hard to win hearts of public, and probably not necessary.– Many in UK still very “Euro-sceptic”: sensitivity required when

talking about long term goals for European integration.• Be mindful of long term objectives

– UK government may be unlikely to intervene, but aggressive or insensitive approach might harm political chances for later acquisitions elsewhere in Europe.

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Tactics: a Two Phase Campaign• Phase one (during auction):

– Sell acquisition business case to LIFFE management & shareholders (focusing on customer benefits)

– Limited media interviews; no public discussion of bid– Use English native speakers to help draft board presentation,

key messages and press releases

• Phase two (if bid is successful):– With assistance of LIFFE management, inform and educate UK

politicians and regulators; European Competition Commission– Educate LIFFE and Euronext employees on acquisition

rationale, benefits for customers– Sell acquisition business case to Euronext shareholders (focus

on long term value and customer benefits)

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OM bid for LSE fails

How the Auction Played Out2000 2001

DBAG IPO

Feb

LSE IPO

July

Euronext IPO

Aug 5

Formation of Euronext announced: LSE

refuses to join

Apr

Sources: Company press releases; The Independent, 10/30/2001.

Nov

DBAG merger with LSE fails

Sep

LIFFE rumors begin

late Aug Sep 27

LIFFE says it has received a “number of approaches”

Oct 29

LIFFE and Euronext announce an agreed deal at £18.25 a share

Oct 25

Final bidder presentations to LIFFE board: LSE reportedly bids £18.50 a share

Sep 29

LSE says it plans to bid between £12-£15

Oct 28

LIFFE reportedly rejects last minute LSE bid of £19 a share

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Battle Lessons

• Strategy is only as good as its articulation• Customers are the ultimate decision-makers• In every battle, never forget the objectives of the

war (i.e., manage for tomorrow)• Consistency of word and deed is essential in

building trust and reputation• You can never understand too much about the

environment in which you operate• Cash is not always king...