Examination of Witnesses (Questions 60-69)
SIR BRIAN WILLIAMSON, MR HUGH FREEDBERG, MR JEAN-FRANÇOIS THÉODORE AND MR GEORGE MÖLLER
TUESDAY 22 JANUARY 2002
60. Going beyond Europe, do you expect that similar process to be under way in a similar form?
(Sir Brian Williamson) Yes, but I think it is very much driven also by technology. The exchanges which are technology-rich will tend to survive; those that are technology-weak or poor I think will have a difficult task. That is why it is so important, LIFFE having reinvented itself and being praised for doing so, but I think it is still vulnerable. I think exchanges are very vulnerable beasts. The markets are very successful but exchanges sometimes do not serve the markets and they lose touch with the markets and, as you know, markets move very quickly. Therefore the whole idea of an exchange moving too slowly for markets is unsustainable now I think, not only in Europe, where at least in derivatives we are leading, but in the rest of the world.
61. I wonder if I could ask your colleagues from Euronext for their own perspective on how this is going to develop. You clearly take the view that you are the dominant player in this field within Europe.
(Mr Théodore) First, to come back to what Brian has said, I very slightly dissent from what he has said. I think that even in underlying cash markets we have seen some moves and at least we have seen Euronext, which has not been so slow because Euronext has a merger which took place in September 2000, and we made our IPO in July. We hope to have Portugal joining us by the end of this month, but that is not a dominant player. We are in a competitive business in which we have three or four leading players - the Deutsche Börse, the London Stock Exchange, Madrid and Milan - in the cash market. I believe consolidation will go on, for the reasons Brian spoke about, at a pace and in a form that will depend on market user demands that our shareholders will follow because, as you know, the only way to bring shareholder value is to follow what market users are asking for, as in any other business. Consolidation will go on and, being in London, we will be better placed to listen to market users, as most of them are in London.
62. Do you visualise your new organisation being a platform for future mergers and takeovers of other markets and other exchanges?
(Mr Théodore) I would tend to hope that it would be a platform for attracting new partners for joint ventures on the European scene. On the American scene for many reasons there are some regulatory hurdles. There is some consolidation between Europe and America.
63. But you take Sir Brian's view that this attraction of other partners would not take the form of building networks of people who retain their own governance structures but consolidating governance structures as well?
(Mr Théodore) It could be both. It could be mergers; it could be joint ventures or partnerships. I think in that field one should not be fixed on the model. We have the model, which is at the same time giving single governance while respecting national jurisdiction, but one should be flexible to the needs of market users. That must not be only in terms of risk but also for cash market investors and issuers. We depend on the reaction of market users, based on the form of the consolidation which is due to go on, globally speaking, in Europe, I believe.
64. If the regulatory structure in the United States was different and allowed this to be possible, would you be going for consolidation, mergers and takeovers with some of the American markets?
(Mr Théodore) The United States is a difficult market. George, apart from his role in Euronext, is the Chairman of the European Federation of Security Exchanges, which includes all stock exchanges, cash markets and cash derivatives. Would it be an issue for all European markets to have the American regulatory regime?
(Mr Möller) As it happens, there will be a delegation of the Federation of Security Exchanges next week to the SEC to put our European case on the table, effectively to ask if there is a possibility of gaining access to the US markets, to put our screens there not only for futures (because that is basically being resolved) and not for single stock futures, but also for equity options and stocks of course, and also to be able to have companies that are permitted to be listed in Europe also listed in the United States. Our assessment is that the United States is still so far away from harmonising and accepting passports that it will take a very long time. We may have a dream as Euronext that we would like to have a merger with an exchange in the United States and move globally. We still feel that, by reason of the hurdles, that is still a long way off. From the industry point of view, we are working on it but it will be a long journey.
(Sir Brian Williamson) Within the group there is quite an interesting seed-corn venture here in the sense that the Nasdaq joint venture is an exchange half-owned by Euronext LIFFE now in the United States and then with a passport here recognised and the overseas exchange recognised here. There is a seed here which was developed over the last year.
65. What did the Battery Blackstone interest within LIFFE, as it was, ultimately decide to do or have they not made their decision?
(Sir Brian Williamson) They sold. They did very well. They were very valuable to LIFFE at a time when I think a lot of people were pretty dubious about whether LIFFE was going to survive. We did not actually need their money at that stage but we would have needed that sort to investment to carry on the programme that we have for LIFFE CONNECT, which was beginning to be successful and beginning to get other people wanting to use it, which meant more money to develop. The crucial role of those investors was at a time when people did not really grasp, I think, what LIFFE was trying to do and they invested. I think there are one or two journalists here who said that there was some smart money going into LIFFE, and that was the beginning of the change. LIFFE at one stage was valued at less than £30 million. Battery and Blackstone came in at a slightly higher level than that and they exited at £555 million. So they had done extremely well, but in return , looking back, they gave us huge poise and developed the change of culture. It helped me and the rest of the board to move that much faster from a demutualised reorganisation to a commercial one. I do not think they expected to get their money back quite so quickly. In that sense, they were rather longer term investors than perhaps most people think American venture capitalists are!
66. Finally, just too tidy up one point that occurred earlier, the share options of course were absorbed in part of the deal; they were terminated as part of the deal. Do you have a different structure of the executive rewards in Euronext?
(Mr Théodore) We also have share options and, on the subject of the share option of LIFFE, our vision of the investors in LIFFE is of their having a good appreciation of the situation and we appreciate also what the smart money has been doing and what the management of LIFFE has been doing. One has to remember LIFFE's situation in 1998 when in six months the battle of the Bund was lost and LIFFE was fighting for survival from open outcry and trying to computerise the system which was CONNECT but not completely developed at that time. Not many people would have bet on LIFFE's chances of survival. I think that the combination of management, users and new shareholders coming in has delivered a lot. That is an outsider's vision of the London financial community
Mr Tyrie: It certainly shows a considerable transformation from when this Committee last met LIFFE.
67. Mr Théodore and Sir Brian, might I put a question to you in order to sum up this morning's session. Mr Théodore, from what you have said, is it the case then that getting into London was important for you, that you did buy a good going concern, that you rated the LIFFE technology and the management and the dominant position that you have in London as very important for you? That allows you to rival Eurex in Europe and perhaps in the medium-longer term offer global opportunities for you with this new company. Would that be a correct summation?
(Mr Théodore) Indeed, yes.
68. Sir Brian, on the Eurex element, you see that as one of the two dominant players in Europe but you do not see not many opportunities for others to come in and that dominance that you have now will enable you to consolidate the derivatives market in Europe which perhaps has more going for it than the match between the equities and the derivatives that the LSE had and will also offer you, as it does to Mr Théodore, the opportunity for global markets. Would that be a correct summation?
(Sir Brian Williamson) Absolutely, yes.
69. Can I thank you, Sir Brian and Mr Théodore and your colleagues, for this evidence session this morning. It was very helpful to us and constructive. It will help us in our deliberations.
(Sir Brian Williamson) Thank you, Chairman, and thank you for your offer to send in a note. We will do that.