Further memorandum submitted by LIFFE
REASONS WHY THE LIFFE BOARD REJECTED THE LONDON STOCK EXCHANGE'S CASH AND SHARES OFFER
1. The Board of LIFFE, under advice, considered that a discount needed to be applied to the share element of any offer made. The reason for this was that a large proportion of the LIFFE shareholders (over 40 per cent) had indicated to the Board that they would wish to sell any shares received. It was clear this would have a downward effect on the price of any such shares offered. It was therefore necessary for the Board to attempt to determine the likely discount that would be applied in relation to any such sale in order to consider the value of a cash and shares offer.
2. The Board therefore took the view that it was necessary to consider a number of elements pertaining to the value of shares which formed 37 per cent of the LSE offer: firstly, the potential for downward pressure on price resulting from significant share sales; secondly, liquidity discounts to be applied, and thirdly, any expected hedging costs. Each of these factors required that a discount be applied to any shares offered. These factors were therefore taken into account when considering the value of the London Stock Exchange's offer.
3. In particular, there were two recent events that gave the Board some indication as to the level of discount required. Firstly, a small parcel of shares in Deutsche Börse had been placed in a rising market at a 6 per cent discount, even though the placing was three times oversubscribed. This had occurred about 10 days before the LIFFE Board meeting. Secondly, when the advisers and broker to the London Stock Exchange were asked whether they were prepared to underwrite the shares being offered, they indicated that they were not.
4. As regards the "cap" and "collar" mentioned by the Chief Executive of the London Stock Exchange during the Select Committee hearing; this would only have applied until such time as the shares would have been physically delivered to shareholders, and therefore offered no real price certainty as to their value on disposal. The Board therefore took the view that there was no material certainty as to the value of the London Stock Exchange's shares in a post-offer environment and resolved that the offer from Euronext, being all cash, represented better and more certain value.
5. In addition, the LIFFE Board appraised the value of each offer against a number of other criteria, which we have already detailed in our written submission to you, of which monetary value was clearly a significant factor, but not the only one.
6. The London Stock Exchange was not offering LIFFE new business, but instead focussed on cost synergies. It was offering a domestic consolidation that would have cut head office costs by merging the two organisations together. However, there was no clear prospect for growth. Their plan would have required a major upfront expenditure of some £53 million in order to achieve cost synergies of £35 million after five yearsa point that we believe was not made clear during the hearing.