Stock exchanges see safety in numbers

Date: 06/04/2000

By Bruce Barnard

PRIME Dutch blue-chip stocks like KLM, Philips and Royal Dutch Shell will emigrate from Amsterdam to Paris by the end of this year and investors who want to buy into Belgium's Delhaize supermarket chain will find it on the French bourse too.

The decision of the Paris, Brussels and Amsterdam stock exchanges to merge marks an important step towards Europe's integration, hastening the day when it will be as easy to trade stocks over EU borders as it is to do so across state lines in the US.

But there is a long way to go. After the establishment of the merged exchange, to be called Euronext, there will still be 20 national stock exchanges co-existing uneasily with Europe's single market and its single currency. And while Euronext is the first cross-border merger between European stock exchanges, it will only trade shares from its three member countries: Paris will deal in blue-chip companies, Amsterdam will handle futures and derivatives, and Brussels will list small and medium-sized firms.

Euronext has, however, accelerated the process of consolidation by mounting a challenge to the front runners, London and Frankfurt, and forcing other exchanges to choose between mergers or marginalisation. It will be Europe's second largest bourse with 1,300 companies capitalised at €2,400 billion compared to London's 2,300 listings worth €3,000 billion, and the biggest in the euro zone with half of its top 50 companies - way ahead of Frankfurt with 1,050 stocks valued at €1,450 billion.

Euronext plans to grow by the time it starts trading in the fourth quarter of the year. It is likely to sign up the small Luxembourg exchange, which already has links with Amsterdam and Brussels, shortly and is talking to London's International Financial Futures and Options Exchange (Liffe) to plug a gap in its fixed income business. Liffe itself needs a strong ally after ceding European leadership of derivatives trading to the German/Swiss Eurex market.

Euronext's chief executive-designate Jean-François Théodore says an acquisition or merger with an American exchange is also likely to achieve its ambition of becoming a global 24-hour trading market.

Euronext has sounded a wake-up call to London and Frankfurt, which have been casting around for a new European strategy after the collapse of their planned alliance and the unravelling of a flanking project for a looser eight exchange partnership, including the Euronext three.

EU governments, naturally, welcomed the merger, predicting that it would lead to further consolidation and eventually to a single European regulator mirroring America's Securities and Exchange Commission. "This merger may lead to an acceleration of the march towards a real European regulator - perhaps first in the euro zone," said Belgian Finance Minister Didier Reynders.

Attention is now shifting to the likely reaction of Madrid, Milan and Zurich to the establishment of Euronext - there have already been reports of talks aimed at linking London and Zurich.

The situation is in flux following the recent vote by members of the London Stock Exchange to demutualise and the confirmation by Deutsche Borse, the operator of Frankfurt's financial markets, that it will launch an Initial Public Offering (IPO) in the summer.

The London vote is seen as a manoeuvre to enable the 199-year-old exchange to take the lead in the coming shake-out in European share trading and to ensure it does not suffer from the UK's opt out from the euro. Chief executive Gavin Casey says London will capitalise on its new status to buy rival stock exchanges rather than signing up to weak partnerships or trying to lure business from continental bourses.

Deutsche Borse's IPO, which could value its Frankfurt operations at up to €1 billion, is aimed at bolstering the exchange's bid to become the leading centre for trading in Europe's blue chip stocks. It wants to secure foreign shareholders and dilute the combined controlling stake of the German banks to become more international.

Until fairly recently, Frankfurt failed to reflect Germany's leading position in the European economy. But the success of the high-growth, high-risk Neuer Markt and the recent record-breaking €190-billion take-over by Vodafone-AirTouch of Mannesmann - Germany's first successful hostile bid - have changed outsiders' perceptions.

The establishment of Euronext was partly a proactive bid to move towards a pan-European trading platform and partly a defensive reaction to adverse market developments.

Brussels was looking for a white knight as its index plunged in thinning trading activity, prompting a threat by Belgian steel and wire manufacturer Bekaert to move to London. Being Europe's fifth largest exchange had failed to ease Amsterdam's fear of being marginalised, while Paris, still smarting from being excluded from the original alliance talks between London and Frankfurt in mid-1998, was a willing ally as it sought to mount a credible challenge to Anglo-German dominance of European share trading.

Consolidation among the traditional bourses is also being driven by increased competition from online exchanges such as Tradepoint, Jiway and ConSors. The bourses see mergers as a way to cut their costs and make cross-border share dealing easier to respond to the growing number of European investors who pick stocks by sector, not by country.

The brash announcement last November by the US screen-based stock market Nasdaq that it planned to launch Europe's first pan-continental online exchange for retail investors within 12 months acted as a powerful spur to rationalisation.

Analysts say that to succeed, Nasdaq, which counts IT giant Microsoft among its stocks, must persuade investors that it can create liquidity in the trading of Europe's top blue-chip stocks as an independent market at a time when European exchanges are merging. They add that it must team up with an European exchange to achieve this, fuelling rumours about a likely partner. London has been tipped as a front runner, but its chief executive Gavin Casey has dismissed such speculation.

Meanwhile, as Europe's stock exchanges play musical chairs, its growing army of private investors can look forward to lower transaction costs and easier cross-border trading.