Examination of Witnesses (Questions 80-99)
MRS CLARA FURSE, MR MARTIN WHEATLEY AND MR JONATHAN HOWELL
TUESDAY 22 JANUARY 2002
80. Going back to the LIFFE bid, in retrospect what would you do differently now to make the bid more successful?
(Mrs Furse) Obviously we have considered this. I have to say that I do not think that there is anything substantive that we would have done differently.
81. In an interview with The Daily Telegraph it was reported "It..." the bid for LIFFE "... did not come to fruition because Euronext put a strategic premium ahead of commercial rationale and from the LIFFE management's perspective it is clear that deal was very attractive". Can you explain to us what is that strategic premium and the commercial rationale that you are talking about?
(Mrs Furse) Normally when one makes a bid for another company one justifies the price that one is able to pay by the value that one is creating. UK corporate standards are very high and what that means is that any deal that one does should be value accretive in year two. So in other words, we knew that the highest price that we could put on the table, £19, was that level because that would still be value accretive in year two. In order to achieve that, to justify that price, we were going to deliver synergies of £35 million a year, that is quite a big number. Now Euronext are talking about synergies of between £10 and £15 million a year which is significantlysignificantlyless. In theory what that means is that their price should have been significantly lower. In practice, what happened was that Euronext put a very generous offer on the table which was a very high price with minimal change attached to it. Clearly that was extremely attractive, nearly all of the gain that we put on the table with none of the pain. Nice deal.
82. Given the speed with which consolidation is happening across Europe now, which are you putting top: strategic premium or the commercial rationale in future?
(Mrs Furse) We put our customers and our shareholders first.
83. That goes without saying.
(Mrs Furse) In other words, we are not going to over pay in order to achieve something, to achieve the closure of a transaction which we could not deliver on. I think that has been reflected, our attitude to this has been reflected in our share price performance this year which has gone from strength to strength.
84. Are you not concerned that if you take that view the same may happen again and you will be closed out of progressive consolidation?
(Mrs Furse) I think if we do not uphold and promote the high corporate standards that the UK is famous for, that would be pretty bad news. It is in our customers' interests, it is in our shareholders' interests that we do what we do in the way that we do it.
(Mr Howell) Can I just add to that? When we listed on our own market in July, that was a very, very clear declaration that we were a for- profit company with shareholder value at the heart of our objectives. Now we have a share register which has about 50 per cent of the register which is the old member firms who have freely transferrable shares which they may wish to buy or prefer to sell but equally we now have 35 per cent of the register who are normal institutional investors and another 15 per cent individuals and other shareholders. When we listed it was quite clear that we were listing on the basis of ensuring that we were running this as an economically viable business with shareholder value at the heart and importantly that goes right through to corporate deals. We feel that it is only appropriate under those circumstances to offer what is commercially acceptable. £19 with those synergies was the absolute maximum we could pay whilst making it value accretive and revenue enhancing for our shareholders.
85. I just cannot understand why you have so much respect for pain and why you did not understand why LIFFE stepped aside from your catalogue of pain?
(Mrs Furse) I do understand it. I was on the board for nine years.
(Mrs Furse) LIFFE has had to reinvent itself. It has been through three pretty challenging years. Clearly they had an easier option. I do not criticise them for that, far from it, I think they did a very nice deal.
87. I decided when I read the papers, the way I saw it you had made an offer they could not accept to the leading people on the board, Chairman, Chief Executive, which in merger talks does not seem sensible to me. Then your offer meant destroying the system which actually saved that company, the CONNECT system.
(Mrs Furse) Can I answer your last question first because actually that is a very important misunderstanding. We were going to base the integrated trading platform on CONNECT. There was absolutely no question of us throwing out CONNECT, quite the opposite. We had two solutions for building the integrated trading platform, one that we had fashioned ourselves and one which was based on CONNECT. It became clear to us early on in the due diligence process that building the integrated trading platform on the foundation of CONNECT, re-engineering CONNECT so that it could do that would both be cheaper and quicker. So we were going to deliver this new integrated trading platform within two and a half years on CONNECT. That is the first point. The second point is that we offered Brian the Deputy Chairmanship, we offered Hugh a Deputy Chief Executive position. We were disappointed that they were not interested in that. We were acquiring this company. Yes, we wanted to merge the two businesses but we were acquiring this company and it would have been highly unusual for the acquiring company to cede the non Executive Chair to the Executive Chairman of the acquired company.
88. It might have been highly unusual but you might have won the bid.
(Mrs Furse) Yes, but we have duties to our shareholders and to our customers. The plan that we had was a big important integration plan with a new IT platform attached. It was a big job.
89. It lost you the bid?
(Mrs Furse) I am not saying it did lose us the bid. No.
90. You could not lose it on the money, could you, because you made a better bid?
(Mrs Furse) I am not saying that.
91. It was the other factors, the personnel factor and the operational factor.
(Mrs Furse) No. I do not think for a moment that either Brian or Hugh would have put their own interests ahead of those of their shareholders. It was never suggested to us that we should reconsider that.
Mr Mudie: I know that sacrificial behaviour is usual in politics but I did not think it was usual in business.
92. I just want to follow up very quickly on that. Why then do you think they did not want to take up that offer of those positions?
(Mrs Furse) I think they were clearly in favour of the Euronext deal. I think it is pretty obvious why, it was a very generous offer.
93. So do you think by them saying that they would not take the position that in effect scuppered your bid?
(Mrs Furse) I do not know because I do not know what the LIFFE board was thinking at that moment. Our final offer was £19, £12 cash £7 equity and around the equity component we had a collar mechanism which meant that it was effectively cash equivalent. We had changed our offer to accommodate the sudden concern about cash. I do not know how the board was thinking at that point. We were not, obviously, at that meeting on 29 October.
94. Are you saying you suspect the Euronext offer was of more interest to them personally than your's was?
(Mrs Furse) No, I am saying that Euronext made a very generous offer to LIFFE with minimal change attached, no change in jobs, no change in management, no change in anything really. That is pretty compelling. LIFFE opted for an easy life, one cannot blame them.
95. It is interesting to us in your opening statement you seem to place quite an emphasis on the decision of those two gentlemen not to take up those two positions. You describe that as one of your disappointments.
(Mrs Furse) Yes.
96. You went out of your way to underline it. Are we actually looking at difficulties with chemistry here? Is that what you are really saying?
(Mrs Furse) No. What I am saying is that it was clear that the Euronext offer was very attractive.
97. Maybe if I could just have a try at that in terms of why LIFFE accepted the bid. What you are saying to us is that it was not strategic in your view, maybe to do with cash, could have everything to do with cash. It had nothing to do with personnel because everybody is virtuous in the City. Maybe at the end of the day the value put by Euronext on access to the CONNECT platform was more than you wanted?
(Mrs Furse) That is right. I do think LIFFE has been through a great deal of change in the last three years, and I know about that because I was there for some of it. That made the Euronext offer all the more attractive.
98. The success of that bid, perhaps the LIFFE board attitude to that, turned on the value they placed on the paper element of it?
(Mrs Furse) I do not think so. LIFFE are particularly well qualified to establish the value of the collar mechanism that we put round the paper elements so I doubt that very much.
99. They would not have thought it was a better long term bet to have shares than the LSE?
(Mrs Furse) No. In fact it would have been a better long term bet if they had accepted our offer because today the offer would be worth £20.60.
(Mr Howell) There is a lot of focus on the potential downside but two thirds was in cash and there was an option for LIFFE shareholders to take more cash if they wanted it, equally to the extent that other shareholders wanted to take more shares. It is called a mix and match. There was this downside protection. Our offer went in when our share price was at £3.40. We were clear that bringing together the two businesses, driving out synergies, would have created an upside and we were confidentand we discussed it with our advisers and that was part of our propositionthat we would have a re-rating of our share price as a result, bringing together two businesses in a consolidation. Very, very importantly, people, I think, chose to focus on the potential downside even though we had given a protection against it without, as I say, focussing on the upside. As I say, when our offer went in our share price was at £3.40, now it is at £4.30. That is just over 25 per cent increase since just a matter of two or three months ago.