Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the London Stock Exchange



  1.  The London Stock Exchange ("The Exchange") welcomes the invitation by the Select Committee to give evidence on "the background to, and the implications of, the (proposed) take-over of the London International Financial Futures and Options Exchange (LIFFE) by Euronext." This memorandum sets out the views of the Exchange on these issues, which we will be happy to supplement before the committee on 22 January.


Rationale for the Exchange's Bid

  2.  The Exchange has been a public company since demutualising on the 8th June 2000, and has been listed on the market since 20 July 2001. As a commercial company, we are driven primarily by delivery of value to our shareholders. The creation of shareholder value was therefore the driving force behind our bid for LIFFE.

  3.  The Exchange is one of the world's leading equity exchanges and a leading provider of services that facilitate the raising of capital and the trading shares.

  4.  It is the most international equities exchange by trading in the world and Europe's largest pool of liquidity. By the end of 2001, the market capitalisation of UK and international companies of its markets amounts to 4.1 trillion, with over 5.6 trillion of business transacted over the year. In 2001, a difficult year for global equities markets, the Exchange produced strong growth, reporting 18 per cent growth in turnover to 106.8 million and 18 per cent growth in profits to 34.2 million for the half year ended September 2001 (Interim Report attached). Trading volumes for calendar year 2001 were up 22 per cent on the previous year, driven by the success of SETS, the Exchange's electronic order book.

  5.  The Exchange's business is organised into three main product lines

    Issuer Services,

    Broker Services, and

    Information Services,

  All of which have significant potential for growth. In Broker Services one of our goals is to extend the product range beyond its current base. The acquisition of LIFFE represented an opportunity to accelerate the growth of the Broker Services product line and broaden our IT sales effort, by:


    —  expanding into exchange-traded derivatives,

    —  combining LIFFE's Market Solutions business with our own Technology Sales and Services effort,

    —  generating important revenue synergies from the combination of our two product ranges and networks, and

    —  delivering significant cost savings through the integration of our technology platforms.

  6.  The Exchange's proposition to LIFFE was a merger based on the creation of an integrated trading platform (ITP). The ITP, based on LIFFE's CONNECT system would have been the world's first multi-product and fully scaleable system, supporting both securities and derivatives; it would have provided a single point of access to two of the world's largest and most international markets. The combined business would have improved its pricing power and competitive edge, thereby providing an enlarged customer base with more products more efficiently, in an increasingly liquid market for inter-related products. It would have enhanced opportunity and profit potential for the sale of marketplace technology, as well as creating important revenue synergies and significant cost synergies of 35 million per annum.


The Exchange's Offer

  7.  Price—The Exchange's final offer was 19 per share made up of 12 in cash and 7 in Exchange shares. The value of this offer was underwritten so that the number of shares would be increased in the event that the Exchange's share price fell. (The LSE share price then stood at 3.40, today it is 4.21).

  8.  Board and Management—Our proposal was to create a new Board drawn from the Boards of the two companies to include 3 LIFFE directors. The Chairman and CEO of LIFFE were invited to join the combined Board as Deputy Chairman and a Deputy Chief Executive. We proposed a Transition Committee to manage the integration of the businesses and to ensure a fair and meritocratic approach to all material decisions.


For the London market

  9.  London is Europe's leading international financial centre and home to the world's largest single pool of capital, a significant proportion of which is invested through the markets operated by the Exchange.

  10.  To retain that leading position the London market must continue to offer "intelligent" regulation, and in particular, work to ensure that the proposals to complete the single market for European financial services enhance London's competitiveness internationally.

  11.  At the London Stock Exchange, we are committed to playing a leading role in the development of capital markets in Europe and globally. We continue to promote constructive debate on important issues such as horizontal integration and the European Prospective Directive.

For the London Stock Exchange

  12.  The Exchange created a vision for the development of a world leading business, combining cash and derivatives on a new and advanced technology platform. The new exchange would have been well placed to provide the most competitive financial markets service of any major exchange in the world. We were disappointed that the LIFFE Board did not share our vision.

  13.  Our failure to acquire LIFFE does not change our strategy. We are a strong and growing company and we have a strategy to accelerate the growth of our business. We are currently working on a number of initiatives to promote additional growth.

  14.  We have recently completed a major investment programme in our technology infrastructure. As part of this we have upgraded our hardware to treble capacity. We will finalise the process of upgrading our network to the latest Internet protocol specification in April, and will introduce a number of new customer services based on this.

  15.  We continue to promote our markets world-wide. This involves significant marketing effort in Asia and the Far East, for example. In Europe, we have recently had considerable success in marketing both techMARK and AIM.

  16.  The Exchange recorded a series of trading records during 2001, the year in which it became a fully listed company.

    —  Electronic trades (on the SETS system) accounted for a record 660 billion worth of trading in 2001, passing the previous record of 531 billion set in 2000 by 24 per cent;

    —  In a difficult market for Initial Public Offerings (IPOs), the Exchange attracted 59 per cent of all European IPOs in 2001;

    —  interim results show revenues and earnings per share up by 18 per cent.

  17.  Building on this strong position, the Exchange is exploring other routes to expanding its business.

14 January 2002



19 March 2001

CF breakfast with BW

5 April 2001

CF/HF meeting. CF proposes Technology Review

19 April 2001

KPMG work commences on Technology Review

21 May 2001

KPMG submit first draft of report

End of June

KPMG submit final version of report

Mid July

LSE Board meeting to consider detail of LIFFE proposition

10 September 2001

CF/HF meeting

19 September 2001

LSE/LIFFE meeting

20 September 2001

CF/HF meeting

21 September 2001

LSE starts due diligence meetings

24 September 2001

DC/BW meeting

25 September 2001

LIFFE announces it has received a number of approaches

28 September 2001

LSE confirms it is considering making offer for LIFFE

28 September 2001

LSE makes initial offer for LIFFE @ 14.50 per share

28 September 2001

LSE sends further indicative offer letter to LIFFE @ 13.70 per share

15 October 2001

LSE sends further indicative offer letter to LIFFE @ 18.50 per share (50:50 cash/shares)

24 October 2001

LSE sends further indicative offer letter to LIFFE @ 19 per share (12 cash and 7 LSE shares plus collar)

29 October 2001

LIFFE announces that it is recommending Euronext offer

29 October 2001



  CF—Clara Furse.

  HF—Hugh Freedberg.

  BW—Sir Brian Williamson.

  DC—Don Cruickshank.


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