The London Stock Exchange, Germany’s Deutsche Borse and Euronext are all aiming to buy Liffe.
The London Stock Exchange, Germany’s Deutsche Borse and Euronext are vying for the reins of Liffe, Europe’s second-largest deriviatives exchange.
Since Liffe is a derivatives exchange dealing with options and futures, while the potential buyers are all securities exchanges, any synergies are unlikely to be derived from technological and business process efficiency gains. This raises a key systems integration issue – a significant factor in any prospective takeover or merger.
The technology question has prompted Euronext and the LSE to state their commitment to replacing their own architecture with something based around Liffe’s Connect system. While this may appease Liffe’s board, it is not necessarily clear that the bidders will be able to perform a smooth and seamless transition from their existing platforms.
It’s easy to see why the suitors are so excited. Liffe’s underlying numbers make positive reading and are likely to get better, with trading volumes for Q3 up 78% on last year. At the same time, falling capital expenditure as a result of the gradual wind-down of the investment phase of Connect will improve cash flow and eventually operating profits.
The contest is relatively evenly matched, meaning it will ultimately depend on which bidder wants Liffe more and has the most compelling business case. The bidders’ motivation is clear. The acquisition will grant access to one of the most volume- and transaction-intensive exchanges in the world – and one that is set to turn into a significant profit generator in the near future.
Two bidders will walk away from this battle with their tails between their legs. The winner will be sitting on a worthy nest egg for the future that will allow for integrated access to equities and futures markets and a far broader and complex product portfolio. Indeed, the creation of this ‘super-bourse’ could forever skew the relatively level playing field of the European exchange arena.
