To say it has been a difficult month at the Deutsche Börse would be putting it mildly. The collapse of the iX negotiations with the London Stock Exchange came as a shock to many in Frankfurt, including the Deutsche Börse chief Werner Seifert.
When the merger between Europe’s two biggest exchanges was announced in May of this year, Seifert claimed it was a done deal, despite the fact that members of the two organisations had not been consulted. Claiming the deal would not collapse, as previous Anglo-German plans had, he confidently announced “The deal won’t break down. We have a 100 page agreement covering the minutest detail, and we have a blueprint of the new market ready.”
Four months later, these proved rather empty words. The LSE, itself in a state of shock following a hostile bid from Stockholm-based OM Gruppen, formally notified Frankfurt that the “done-deal” was about to be undone. Despite trying to disguise the reasoning behind a claim that the LSE needed to concentrate on repelling the unwanted bid, London’s withdrawal was blamed on the failure of the two exchanges to resolve a number of issues raised by the deal.
Frankfurt’s response was initially low-key, and then confused. First of all spokesman Walter Allwicher announced that although disappointed by London’s decision Frankfurt was looking at other options. “The decision taken by the LSE to end talks has been received with regret. The Deutsche Börse emphasises that the merger represented an important step in the consolidation of exchanges across Europe, and would have provided enhanced value for shareholders. The Deutsche Börse will now reconsider its position whilst keeping all its strategic options open.”
London took this to mean that Frankfurt had abandoned the merger plan, and would not be coming back for talks after the OM Gruppen bid was settled. Within hours, however, a leak from the Frankfurt entity suggested that it was considering preparing a bid for London also.
A shaken Don Cruickshank, LSE chairman, quickly responded that “Deutsche Börse is not a white knight for the LSE”. Frankfurt was also stung by Cruickshank’s remark that the LSE would be better equipped to “take the initiative” after pulling out of iX if it could defeat the OM bid.
Sources close to the management board in Frankfurt suggest, however, that a hostile bid is not on the agenda, at least not until London’s response to the Swedish bid is published and analysed. It seems a revived deal could still be the preferred option, although the role of Nasdaq, which had been talking to both exchanges and monitoring developments with a view to perhaps joining the merged entity, is far from clear.
Its chairman Frank Zarb said that he remained committed to a stake in a pan-European trading platform. Nasdaq had a joint venture agreement with the fledgling iX, and continues to talk to both parties.
Although most of the noise about the problems of the merger first of all came from London, especially from some of the smaller members, the iX deal was also viewed with some skepticism in Germany. There some of the larger members, including some board members doubted that it could be made to work, or indeed that it was desirable to have blue-chip German stocks listed in London.
Even the heavyweight Dresdner Bank in Frankfurt has aired its doubts, whilst retaining a firm commitment to consolidation across Europe. “We believe that consolidation is necessary, as there are clearly too many exchanges for a single currency market,” said Stefan Lutz Dresdner’s spokesman in Frankfurt.
The reference to the single currency is a telling remark. A senior figure at another leading European bank believes that Britain’s absence from the Euro-zone may have been a telling influence on the collapse of the deal. “It is not as easy to create a pan-European exchange as many have suggested. Europe is not the US, and this is a bad analogy. There are problems of language, and national identity which lead to competitive stances,” she said.
Adding that many senior figures across Europe doubted that the deal would ever go through, she added “Everyone recognises the need for consolidation, and the involvement of Nasdaq is considered a very positive thing. However, none of the larger German companies were enthusiastic about being quoted in London, and indeed some have made that clear publicly. It was not only the problem of what currency to quote in, but quite simply a conflict of characteristics. Anglo-German initiatives have always run aground on that.”
Lutz denies any lack of enthusiasm for the iX deal from Dresdner. “We felt iX was a very good idea, and we supported it in principle, both as a board member in Frankfurt and as a member of the London Stock Exchange. Now, however we must look for different solutions, but still aim for greater consolidation across Europe, without the friction of long-term national competition. There are many alternatives, and it is too early to say which should have preference over another.”
It may not only be national friction which delays pan-European plans for Frankfurt, as there are suggestions that the egos of the principal negotiators has been a problem in the past. The departure of LSE chief executive Gavin Casey earlier last month was said by some to emanate from his hostility to a pan-European plan, and his conflicts with other negotiators.
A similar challenge may have to be tackled if Frankfurt is to take up discussions with Euronext, the Paris-Amsterdam-Brussels merger which became reality at the end of last month. As the first genuine European exchange, Euronext is clearly a potential partner for either London or Frankfurt, but Euronext spokesman Bruno Rossignol feels the German Börse is now in a difficult position. “I do not think there is a clear market sentiment indicating in which direction Frankfurt should now move,” he said. “They are in a difficult situation at the moment.”
Rumours abound that personality clashes between the Frankfurt and Paris boardrooms has prevented previous talks reaching fruition.
Suggesting that Frankfurt were as much caught out by London’s withdrawal from talks as the latter were by the OM bid, Rossignol says the Deutsche Börse has few options at the moment. “Perhaps the right way forward would be for them to concentrate on selling their trading platform to other markets. Technology is the driving force here, and that alone will determine productivity.”
So far as any link with Nasdaq is concerned, the popularity and success of the NeurMarkt, which has again had a successful year attracting a large number of IPOs, could be a stumbling block. It was a key element of the iX plan and is still the most dynamic market in Europe.
The challenge facing Frankfurt at the moment is to come up with another development strategy to replace iX. There are indeed many options open to them, but members will be asking what is best for them. Many still seem not to have come to terms with the fact that physical exchanges are about to be consigned to history. The Börse’s advantages of its well-developed electronic trading platform should stand it in good stead in the future. Having thought it had found the perfect partner in the LSE, it was rather stunned to be jilted at the altar after the arrival of a new suitor. Now the board must make sure that Frankfurt is not left behind as more plans for a European exchange emerge.
This is unlikely, as technology is set to dictate future deals. Nonetheless, the iX fiasco has been a sobering lesson for the German board. Next time around less haste may mean more progress.

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