From the September 01, 2006 issue of Futures Magazine • Subscribe!

Inside the courtships of Euronext

Don’t be fooled by consolidation. The war between exchanges continues, and once more the battlefield could be Europe. The story of how Euronext went to market, and came home with the NYSE as a potential partner has drama and intrigue, and seemingly, no ending. What started as a simple breakfast could become the lightening rod for a Trans-Atlantic global exchange, or European boxing match. It shows how business can operate behind the scenes or use the press to set strategy. It shows the fickleness of courtships. It shows that nothing is easy. This story begins almost two years ago....

“In December 2004, I got an e-mail on a Sunday night from Clara Furse, the London Stock Exchange chief executive,” remembers Euronext’s CEO Jean François Théodore. “She was telling me that I should read the papers the next day.” Sure enough, there was some interesting news: Deutsche Börse, which was still in merger discussions with Euronext, had made an unsolicited bid for the LSE.

Théodore was in for another big surprise. A year later when he went to New York to have breakfast with John Thain, NYSE president, the Frenchman only expected nice conversation over doughnuts and maybe some food for strategic thought. What he got was an articulated proposal to partner with the world’s largest exchange. “You don’t need to heap nice stuff on me like that just because I came [to New York],” a jetlagged Théodore says he told Thain.

Sure, relations between the New York exchange and the French bourse, and then with Euronext, had traditionally been good. And at a Paris marketplace conference, held in New York in October 2005, Thain had gotten on well with the French Economic and Finance Minister Thierry Breton, and with Gérard Mestrallet, president of Europlace, an organization set up to promote the Paris market place. This despite Mestrallet, also CEO of utilities group Suez, telling him that he wanted to delist his company from the NYSE. Although the NYSE had expressed publicly its interest in diversifying and looking towards Europe for that purpose, Théodore — like most market professionals at the time — thought that the Big Board was not ready yet for such a move.

But in fact, Thain had been very busy in the fall. He had brainstormed with the members of his board and decided to speed up the exchange’s international strategy. Théodore’s pride welled up when he heard the former Goldman Sachs operations chief say that Euronext was the one because of obvious reasons: the NYSE needed to diversify its asset classes and Euronext derivatives would help in that regard. Euronext also could help in terms of computer technology, and finally, foreign companies, from Russia, China and India, fearing the cumbersome U.S. Sarbanes Oxley rules, could opt for a Euronext-NYSE platform and be listed in Europe and in euros, the European currency already being second in importance behind the dollar.

For Euronext, such an opportunity could not be missed. When the first, and by far, premiere exchange in the world acknowledges the merits of a business model, when a business can get even further international reach, when the euro can serve as an alternative to the dollar, and when a derivatives business can benefit from new U.S. and international products distributed on a network through its technology, then such a project has incredible growth and esteem potential.

It was thus time for the Euronext executive to go home and work. The next time the exchange teams met, it was at the International Federation of Stock Exchanges meeting, set in Milan just the weekend after Davos. Technical issues were the focus, and hours were spent on that Sunday of the meeting hashing out technical complexities.

New meetings were then scheduled in Paris. For more convenience, the NYSE leaders even had the Ritz Hotel’s back door, which was directly across from Euronext Paris office’s main entrance, reopened. It had been closed ever since Lady Diana took her last fateful steps from the hotel in 1997. Technical issues having been dealt with, a traditional discussion on corporate matters took place.

“Nothing was done in a rush. It took us weeks of intensive, collective and positive work to draw the framework

of the combination agreement,” says Théodore, responding to critics who say he made some rash decisions by locking Euronext in an agreement with the NYSE.

A lot of champagne was drunk at the official announcement at the Palais Brongniart, the old Bourse building in the center of Paris. But this saga was not over, in fact, it was just the beginning of an all out debate on what was best for Euronext’s future, especially in France, where anti-Americanism is still rampant.

“But in some cases, it is simply sincere European sentiment,” explains Théodore. And though Euronext is a Dutch-incorporated company, with 70% of its business done outside of France, and with the French representing only 15% of shareholders, the French managed to appropriate the debate for themselves. Appropriation is the word, because even French President Jacques Chirac, meeting with German Chancellor Angela Merkel a few weeks after the Euronext-NYSE announcement, did not hesitate to join the fray, saying that a European platform — which would include the Germans instead of the Americans — would be a true achievement for Europe. It is not unheard of, even in the United States, for politicians to interfere with private business decision-making, but still, Americans — and even John Thain, who has worked in London, knows Europe quite well and is even a soccer fan — might have had a hard time understanding what that was all about.

Next the debate was taken over by the Germans, again in the name of so-called Europeanism. When Frankfurt threw its weight into the battle, Théodore was not as sanguine as before, as officials from Deutsche Börse held several rounds of meetings in Paris, trying to muster support from French market players for their Euronext-DB project. Though French brokers, as well as some multinational companies’ leaders, saw a business opportunity in a Euronext-NYSE merger, others seemed to look at the deal from another vantage point. They had invested in Germany or in the Deutsche Börse, which was particularly the case for some hedge funds. For them, a merger between Deutsche Börse and Euronext made perfect sense, as they were intent on improving shareholder value.

However, considering what has happened so far, it is not sure that Deutsche Börse will be able to make the necessary concessions — such as abandoning the idea that the headquarters of a European exchange regrouping Euronext and the German Börse be in Frankfurt, or that clearing be separate from other operations, as users are asking for — to get to where it wants to be. Euronext’s officials believe that a deal with Deutsche Börse as it is today would spell the death of Euronext’s marketplaces and the loss of its efficient derivatives technology. To wit, the comments, made by Deutsche Börse’s supervisory board chief, Kurt Viermetz, at the end of March 2006 when he thought there were no reporters in the room is an eye opener: “Everywhere one goes, one hears that Frankfurt already has the European Central Bank. If the entire stock exchange landscape were to move to Frankfurt, then you can turn off the lights in the rest of Europe,” he said.

So what’s next? Can the Germans throw another wrench into the works, ideologically or otherwise? Indeed, Deutsche Börse might try to enter a bidding war with the NYSE. But no matter what happens in the near future, Euronext is confident that the option to merge with the NYSE, which does not include breakup fees, will eventually prevail. The vision is that such a merger would be good for the company and also be good for the future of all Euronext’s market places, including Paris, which would truly become the financial capital of the Euro zone. Of course, shareholders will have to give their nod to such a transatlantic move. If everything goes well, a closing could take place after regulatory approval by early 2007. Such a transatlantic platform could then woo Tokyo and other exchanges in Asia to create a truly around-the-clock, around-the-world exchange.

By Irène Frat, in Paris

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