Examination of Witnesses (Questions 70-79)
MRS CLARA FURSE, MR MARTIN WHEATLEY AND MR JONATHAN HOWELL
TUESDAY 22 JANUARY 2002
70. Mrs Furse, welcome to you and your colleagues to this evidence session this morning. It is very good of you to come along to provide us with this evidence. Can I open by asking about the future for the London Stock Exchange. In little under 18 months the London Stock Exchange has aborted a merger with Deutsche Börse, successfully fought off a takeover bid from Sweden's OM Group and lost a takeover battle for LIFFE. How would you describe the past 18 months for the London Stock Exchange and, more particularly, where does the LSE go from here?
(Mrs Furse) Thank you very much, Chairman, good morning to you and to members of the Committee. Shall I introduce myself and my colleagues for the record?
MRS CLARA FURSE, MR MARTIN WHEATLEY AND MR JONATHAN HOWELL
(Mrs Furse) My name is Clara Furse. I am Chief Executive of the London Stock Exchange. On my right is Martin Wheatley, my Deputy, and on my left Jonathan Howell, my Director of Finance. We are very pleased to be here today to assist you with your inquiry and, if I may, Chairman, make a few opening remarks, I think that will help to put our bid for LIFFE into context. I am very conscious of the fact that the London Stock Exchange is often referred to as an institution. This is not my perspective. I see it as a thriving business providing an important service to the most international financial services centre in the world and performing a vital function for a large and growing UK economy. Last year was a very important one for the Exchange in which we completed the transition from a mutual organisation to a public listed company, with our own listing in July. We now have a strengthened management team, a restructured board and access to new sources of capital. We are now much more keenly focussed on serving our customers and creating shareholder value, and it is within this context that our offer for LIFFE should be seen. The Committee may be aware that I have spent 20 years in investment banking; my background was mainly in derivatives. Therefore it seemed obvious to me that there was clear business logic in combining cash and derivatives on a single trading platform within a single organisation. We were convinced that this would be strongly in the interests of both sets of customers - LIFFE's customers and our customers - not just at the point of transaction, but downstream in terms of creating operational efficiencies, simpler risk management processes and so on. This concept was validated in a piece of research, a study, that we jointly commissioned with LIFFE and which was completed by KPMG in July of last year. Obviously there was strong commercial logic too because the combination of the London Stock Exchange and LIFFE would have created a bigger, stronger and significantly more profitable business. The enlarged group would have enjoyed a substantially enhanced competitive position and the combination of the two businesses, we believe, would also have fully underwritten London's position as a pre-eminent financial services centre. Naturally, we were disappointed that the LIFFE board did not share our vision for the future. We never pretended in our conversations with LIFFE management that combining the two businesses would be easy - mergers never are - but we believed that this was a prize worth striving for. We were particularly disappointed to be informed just before our final offer was received by the LIFFE board for its consideration that the Chairman and the Chief Executive of LIFFE had decided that they would not join the board of the combined business if the London Stock Exchange won the auction for LIFFE. This is now behind us. Our strategy is clear and well-defined, and we are looking at a number of opportunities for accelerating the growth of our business. Our core business is strong and it is profitable and our performance in 2001 speaks for itself. We had an increase in trades of 22 per cent; the volume going through SETS, our electronic order book, went up by 89 per cent; our shares enjoy a higher valuation than that of our peers, which underlines the confidence that investors have in the company. In fact, in 2001 the shares of the London Stock Exchange were the tenth best performing shares in the FTSE-350. This is a record of which we are proud and on which we intend to build. Thank you. I hope, Chairman, I have made it clear that our offer for LIFFE was very different to the attempted merger with Deutsche Börse through iX and also very different to the defence that we put up in respect of OM Group.
72. Perhaps my colleagues will inquire into the details of the possible merger but I want to look at the future, mindful of the fact that the 1990s was a turbulent time for LSE, with regular changes of Chief Executive and others. You now find yourself in a position where the merger that you wanted to go ahead is no longer. In a recent interview with the Daily Telegraph in the "Saturday Profile" you mentioned that you still wish to lead the consolidation of global stock exchanges, and you have clearly enunciated that in your own words. Could you share that with us this morning because here is a view, perhaps, that that could only be achieved by a merger, say, with the United States - the Nasdaq or the New York exchange.
(Mrs Furse) There are obviously a number of ways in which the consolidation and rationalisation of the capital markets business globally will take place. I will ask Martin to speak about that in more detail. The key point here is that we are by far the biggest market in Europe. Last year we traded nearly 50 per cent more than Euronext by value and we traded nearly three times as much as Deutsche Börse by value. So we clearly have a market here which is tremendously successful. The community that we serve does what it does exceptionally well and I think the business environment in which we operate is clearly very favourable. Obviously we are in a very strong position to decide how that consolidation and rationalisation should take place, but this does not imply necessary that we need to do a corporate transaction to achieve that. Martin might want to elaborate.
(Mr Wheatley) I think that is very important. Lots of time is spent on the big corporate deals and it may be that corporate deals are a way to achieve the consolidations that we are aiming for, but what the users are looking for is a more simplified structure in which to operate, particularly in Europe but world-wide, which means lower costs and more standardised practices and procedures. We have been leading the process. Two years ago, before the abortive merger with Deutsche Börse, we led a process amongst European exchanges to standardise how the markets would work, and we were very successful in achieving that. We have been leading the process in terms of regulation in the UK. It is not just ourselves but the FSA and the UK standards of regulation and corporate governance and transparency are respected world-wide. We have been leading the process through setting the standards. We intend to lead the process through developing our business and making it clear that we have a very strong and very profitable business and hopefully we can lead the process through consolidation, through mergers and acquisitions. As has been very clear to us, and I am sure it is clear to you, that is a difficult process. It will take time and many attempts to get it right.
73. You have suggested, Mrs Furse, that the last 18 months have been very successful in trading terms for the exchange but both the two strategic moves did not come off; you failed both of those, the German merger and the LIFFE takeover.
(Mrs Furse) I think those two attempts at a corporate transaction were completely different. One of the striking differences between the attempt to create iX through the merger with Deutsche Börse and LIFFE was that iX was clearly not supported by most of the Exchange's customers. Our bid for LIFFE was strongly supported by the customer community so the approach was quite different. The reasons for not closing that deal were also completely different.
74. What was similar was that they both failed, both those mergers?
(Mrs Furse) Yes, that is right. I think we are in an environment where standard rules of commercial behaviour do not necessarily apply because also, if you look at the detail behind the iX plan, there were very, very strong synergies there. The financial rationale was very powerful but it was not supported by the customers. In the same way we believe that we had by far the strongest proposition to LIFFE. We were certainly in a position where we had the strongest economic rationale but we were in an auction and we were bidding against two others. I think the interesting thing about this auction is that the party with the weakest economic rationale won the auction. That is quite unusual.
75. To your critics it might seem as if the Exchange was rather flailing around the strategic bid?
(Mrs Furse) I do not think so at all. I think it is perfectly clear that this was an opportunity for us to build our Broker Services product line, to add to our IT sales business. I think our proposition was clear and it was compelling.
(Mr Wheatley) If I could add to that, Mr Fallon. I am sure you are aware that Clara was not at the Exchange for both of those transactions, the Deutsche Borse transaction was before Clara's appointment. In terms of "flailing around", both of them have been part of us, as a business, seeing a future which involves consolidation amongst markets. Both of them have been us putting a case that we believed, on a number of criteria, was a very positive case as to why those transactions should have support. As a business, we face a slightly stiffer test than most FTSE companies. We are a FTSE company, we feature in the 250. We are classified rather like other UK plcs but the tougher tests we have are that we are not just there to satisfy shareholder value, which is obviously important to us and prime in driving us forward, but we have to satisfy a very broad and important customer base as well, and we have to satisfy what is sometimes quite difficult to articulate but a general belief that the Exchange's business has a wider significance and a much more important significance than just as another FTSE company. We have three tests that we have to satisfy each time. Far from flailing around we have taken a very consistent approach which said "We see consolidation as an important step forward. We have attempted, both with good shareholder considerations, two attempts to achieve that". As I say, these things are not easy to bring about. The fact is that we failed but we failed for different reasons in each case.
76. Merrill Lynch, for example said "Forecasting the LSE's strategy is like trying to piece together a jigsaw whilst wearing a blindfold. We know what the pieces are, but with little clear direction implied by management, it is tough to see how they fit together".
(Mrs Furse) Manus Costello is a very good analyst.
77. Is he right though?
(Mrs Furse) One of my favourites actually. I understand this, there is a great deal of interest in whether the Exchange might or might not be engaged in trying to do another corporate transaction. I am always at pains to point out that a corporate transaction is not an end in itself, it is a means to an end. Because we are not in a position where we are going to make perfectly explicit to anyone discussions of a sensitive commercial nature there is some frustration but clearly we have to put the interests of the business, the Exchange, and its customers first. We would not be doing that if we were answering very specific questions about potential corporate transactions.
78. I understand that. What strikes me is that you seem to suggest that looking at opportunities is a strategy. Now when Mr Cruickshank, one of your many predecessors, gave evidence to us back in 2000 he said "We have had to participate in European rationalisation." Is that your strategy?
(Mrs Furse) There are two parts to the strategy. We have a very strong core business and I do not think it is an accident that in a very difficult marketit was a very difficult market for global equities last yearwe were the best performing stock market in the world. Okay, so we must be doing something right. We are introducing all sorts of initiatives that are serving our customers extremely well, trying to anticipate their needs and delivering into those needs. CREST network is one, the RSP Gateway is another one. We were behind central counterparty. That is an extremely important service which is clearly in the interests of the community that we serve. We are fairly busy delivering what it is that our customers need. In addition to that we are looking at ways of accelerating our growth. We have a number of opportunities. We have some very interesting proposals and believe me, we are very busy.
Mr Fallon: Good news for the shareholders.
79. You mentioned the growth in derivatives is there. If that is the case then do you intend to get into expansion of the derivatives market?
(Mrs Furse) We are looking at a number of ways of extending our product base. LIFFE was a route into that, into expanding our product base for our broker services' product line. There are a number of other ways to do that and that is precisely what we are doing. We are introducing covered warrants later on this year. We serve already a very large over-the-counter equity derivatives market very well. They use our market extensively. We are looking at a number of other derivatives' led opportunities.