Examination of Witnesses (Questions 100-119)
MRS CLARA FURSE, MR MARTIN WHEATLEY AND MR JONATHAN HOWELL
TUESDAY 22 JANUARY 2002
100. Could I ask you, Mrs Furse, is it conceivable you could merge with Euronext?
(Mrs Furse) Well anything is conceivable but obviously we have a number of discussions going on with all of the major exchanges. What we are looking for is a way of improving the service that we deliver to customers in rapidly globalising markets and creating value for our shareholders. So those are the two factors that we use, the two tests that we apply in evaluating any proposal.
101. I ask that because there is a feeling that a merger with Euronext might not be possible because they pursue a vertical model and there is a feeling that may not be the Anglo-Saxon LSE way of doing things. Are there any reasons why you would not pursue a full merger with a vertical exchange model outfit?
(Mrs Furse) We are not looking for a corporate transaction in order to achieve a corporate transaction. If it is clear that we can create value and deliver something significantly better to our customers via a merger then of course we will do that. That is not our starting point. Does that answer your question?
102. It does. Your favourite analyst, amongst others, has suggested that one of the reasons you might not want to pursue a merger with Euronext is for that reason; they are organised on vertical model lines and the LSE would have some resistance to that. Is there anything in that?
(Mrs Furse) Yes. I do not think Jean-Fran"ois would be too happy to hear himself referred to as vertical, he sees himself as a horizontalist, I am sorry to use this horrible City language. The real vertical silo is Deutsche Börse. Deutsche Börse are actually reinforcing their vertical silo by trying to buy the other half of Clearstream. Euronext are somewhere in the middle because they own Clearnet, which is their central counterparty but they do not own their settlement depository so they are somewhere in the middle. We are very strongly in favour of horizontal integration because we believe exchange business should be kept separate from clearing and settlement business. It is in the interests of our customers. It reduces systemic risk. Certainly it reduces the `cost per lot' or the unit cost of doing business in our markets. So we have different business models, I think is the best way to put it, but that does not necessarily preclude us from doing something with a different exchange. What we will not do is invest on behalf of our shareholders in clearing and settlement functions in order to increase profit margin which would increase costs to our customers.
103. You said in The Observer at the end of last year "We are talking to a number of parties. Alliances, joint ventures or fully fledged mergers are all possible. Watch this space". I am not going to attempt to draw you into specifics. You have talked about merger, anything is conceivable. I just wonder, just on a point of information, whether you can explain to us what in principle, not in relation to any particular plan, in principle what sort of joint venture might you want to enter into? What would it look like? What would an alliance look like? I am really trying to understand in practical terms what all this is about? This is quite separate from merger, forget that.
(Mrs Furse) I did not say "Watch this space" by the way.
104. That is an Observer journalist for you.
(Mrs Furse) The rest of it was accurate so I am happy. Martin maybe you would like to speak to that.
(Mr Wheatley) Yes, I am very happy to. In very simple terms, it has either got to deliver cost savings for us or it has to deliver additional revenue for us. We have an example which is in the public domain of an alliance, a strategic partnership with the Johannesburg Stock Exchange where we are going to be running their trading systems from our London operation. That is a good example of strategic alliance. We both benefit: we defray the total cost of our systems over some additional volume and for them it means that they save the cost of reinvestment and rebuilding in technology. That is a good example of a cost saving style of alliance. We might also look at joint ventures, alliances where we felt we could win more business than we could win on our own. Clearly we have the dominant position in UK equities, that is our core market, that is our bread and butter. Actually there are a lot of markets where we are a small player or are just getting into. That is typically the trading of other international equities or other products, potentially derivatives products. We would enter into a joint venture if we felt that the two parties together could achieve more than either one could on their own.
105. You have given a good example of the South African Stock Exchange. An alliance or a joint venture, what could it encompass in relation to Euronext in principle? An alliance or a joint venture with Euronext?
(Mr Wheatley) It is difficult to answer that in principle. There may be areas that we could explore and we have had talks with a number of exchanges in the past. I am not sure there is anything specific on Euronext or any other exchange that we would want to put in front of you because clearly there are a very wide range of options. It is about winning new business that we might not be able to win otherwise.
106. I understand that. I am not trying to stray into commercial matters that quite properly you want to keep secret, I am not trying to do that. I am just trying to understand what are these potential sources of new business which would be beneficial to your company? I am trying to understand what areas a joint venture might bite on. You have given one example of the South African Stock Exchange which is an easy one, I just wonder what other examples there might be?
(Mrs Furse) New products for instance, single stock futures for instance, okay, which tend to thrive in an environment where there is some inter-relation between the single stock future and the cash market. Also we are looking at building our relationships in the other time zones because our market is globalising very rapidly.
107. Which time zones in particular?
(Mrs Furse) Asia and North America in particular. There are lots of different ways we can do that through commercial deals, through technology deals, through corporate transactions potentially.
108. Anywhere else apart from Asia? Did you say America?
(Mrs Furse) The US, yes, as well.
109. One final question. Why has that not been pursued more aggressively prior to your installation? Is this something that has been locked in a drawer in the Stock Exchange and not pursued? This sounds very exciting. It sounds rather interesting. Why has it not been done before?
(Mrs Furse) I think there were certainlyand Martin and Jonathan can obviously provide a a bit more detaila number of initiatives to make the capital markets' business, not just in Europe but globally, more efficient for our customers. I do not think it is right to say that there were not a number of initiatives going on. The difference now is that we are a commercial company. We are no longer a mutual. Only 20 months ago we were a mutual organisation with a quite different perspective on life. Now we have access to new sources of capital. We have customers who want a more global service and we have shareholders who quite rightly expect us to create value. That opens up all sorts of avenues for us that were not there before.
110. At first you seemed very relaxed about the position and the way you are dealing with it. Last year we had your Chairman and your predecessor here saying how important it was to the future of the Stock Exchange that the merger with Deutsche Börse went through and exchanges all around you in Europe are consolidating. Are you under some pressure to merge or takeover or be left behind or left out?
(Mrs Furse) I think it is quite clear, I am sorry if I seem overly relaxed but the fact is that we have an extremely good quality business. We are serving a fantastically successful market in London. We had a very good year. I think we are in a position of strength. I think if you look at the size of our equities market and you compare it to other markets in Europe, if you look at the international nature of our market and the amount of trading that we do in London, clearly we have something special. The business environment in which we operate, as I said earlier, is extremely attractive. We have high corporate standards in the UK. We have high standards of corporate governance. We have high levels of transparency. We have intelligent regulation. All of those things make this environment very productive and very attractive. So, whatever we do, we are in a position to do from that position of strength, on our terms, which is in the interests of our customers and our shareholders, and that is what we intend to do.
111. You do not think even in that position of strength the options are closing down?
(Mrs Furse) Anything but. We have a number of very interesting options in front of us and we are the partner of choice for virtually everyone.
112. Is it a viable strategy for the London Stock Exchange to rely on organic growth, avoiding mergers and takeovers and relying on their own efforts for the business?
(Mrs Furse) Obviously my primary responsibility is to the core business. Obviously we are doing a lot of things to grow the business organically. We are looking, also, at a number of opportunities for accelerating the growth of our business so we are not relying on anything. We have some opportunities, some very interesting ones and we are exploring those.
113. It is not a viable strategy to rely on organic growth on its own?
(Mrs Furse) I do not think it is in the interests of our customers or shareholders for us to sit on our hands and watch the world go by.
114. Mrs Furse, you said in February in an interview with La Tribune that Euronext was a good idea "... but the future will show if the results will be forthcoming". What do you think of it now ten months on?
(Mrs Furse) I have a lot of respect and admiration for Jean-François. I think what he is doing is ambitious. Obviously as most ambitious plans are, they are difficult to implement but things seem to be going quite well.
115. Are you surprised at the rapid success they seem to be making?
(Mrs Furse) No, I am not surprised. I think Jean-François has had a clear plan to bring together a number of smaller markets on to the Euronext trading platform. He is implementing that plan. We have a different plan. I think his plan is interesting and I wish them very well.
116. Is it not a rather good model of European consolidation?
(Mrs Furse) I think the question for us is whether it is the most efficient and productive model because our focus goes beyond Europe. We are a global market with a global community to serve and that means that our perspective is broader. There may be, in fact there almost certainly are, things to do globally which would include Europe but that does not mean that Europe is necessarily our primary focus.
117. Is there not a danger in that your home base could be eroded whilst you are looking to pastures new in Asia and America?
(Mrs Furse) I think my answer to that is that we have 99.7 per cent of the UK market and we are aiming for 100 per cent. We are not planning on any erosion.
118. The biggest moves with Deutsche and LIFFE all had a theme of getting into the derivatives in a bigger way. Is that part of the strategy? The strategy you seem to spell out is expansion of your core business and then we go into vague talk about "I cannot really tell you but there is a lot going on". On the evidence of the last two moves, it is derivatives that you have got your eye on?
(Mrs Furse) No. I do not think that is right.
(Mr Wheatley) If I may, exchanges are relatively fixed-cost businesses.
119. You are not interested in derivatives?
(Mr Wheatley) No, sorry, that is a stronger point than the point I am making. We both run very similar businesses in terms that we process lots of transactions through our network, through our platform. Those platforms are relatively fixed cost. If you bring two organisations together, we have both got a lot of headroom, you could run two sets of volume through one platform. That is the essence of it. There was an opportunity in the case of LIFFE to get into some new market areas, derivatives was one, into some technology business was another. There was a similar but slightly different opportunity with Deutsche Börse. The driver in each case was value creation from taking a significant cost out of the structure of the two businesses.