Analysis - Furse eyes future at Stock Exchange.
New chief executive Clara Furse thinks that flotation is one answer
New chief executive Clara Furse thinks that flotation is one answer
The appointment of Clara Furse as the fourth chief executive of the London Stock Exchange in less than a decade drew attention yet again to the crises it has faced in recent years and the difficulty it has had in developing a strategy.
Furse, and chairman Don Cruickshank, will have to work quickly to establish the credibility of the exchange if it is not to be swallowed up or run into the ground by competitors. But before Furse can start finding answers, she will have to focus on what the right questions are.
What is the London Stock Exchange for?
Get the answer right to this question and a lot of other answers will fall into place. First, it’s worth bearing in mind what the stock exchange isn’t these days. It isn’t a marketplace – there is no exchange inside the stock exchange tower – nor is it even a regulator.
Virtually all regulatory powers over how listed companies conduct themselves while floating and afterwards have been handed over to the UK Listing Authority, part of the Financial Services Authority. Even its monopoly position as a supplier of regulatory company statements (profit announcements, share holding statements, etc) is under scrutiny.
This, of course, makes what the stock exchange does easily transportable overseas. Unencumbered by premises or local regulation, it is effectively little more than a share-trading platform that can be adopted almost anywhere.
What’s lacking, however, is the settlements side, which is handled by the separate businesses, Crestco and London Clearing House.
It is open to debate whether this more mobile stock exchange ought to change its name, scrap its centuries-old crest and drop its motto – Dictum meum pactum, My word is my bond – to make its services more attractive to foreign multinationals looking for somewhere to have their shares traded.
Who are the LSE’s customers?
Until its partial flotation last year, the LSE was a mutual organisation, owned and run by, and for the benefit of, the member firms. They were charged for the market services the LSE provided, and had to undertake considerable expenditure of their own to be able to work with the developing trading and settlement platforms.
But there was, essentially, a one-to-one relationship between the owners and customers, just as in any mutual organisation.
The companies that paid to be listed on the exchange were not really ‘customers’: there was little likelihood that any UK company would take its main stock exchange listing to New York or Frankfurt. Hence, the LSE was essentially a monopoly supplier to listed companies.
The same went for the share price and news information services it charged for.
Not now. As equity capital is increasingly global the largest companies can take their listing where the money is, rather than list with their domestic exchange. When a monopoly is no longer a monopoly, greater efforts must be made to provide what they want.
And what they want, as GlaxoSmithKline FD John Coombe told Financial Director last year, is ‘the most efficient mechanism for having their shares traded’ so as to reduce the cost of capital.
Moreover, as the LSE’s existing owners, the stockbroking firms, buy and sell their shares in the LSE, the shareholding base will gradually shift – or perhaps not so gradually once the 4.9% shareholding cap is lifted, as is now proposed.
So rather than the one-to-one relationship between owners and customers the exchange enjoyed, it’s going to have to confront the fact its customers are now the companies that list on it, and the owners may well be institutional investors. They are going to be as interested in how the LSE delivers shareholder value as in the quality of its services.
This change has raised fears Furse has been brought in to flog the exchange to the highest bidder.
Certainly, it is sitting on considerable assets: more than #200m in cash plus an ugly 1960s building that’s worth over #100m. Still, fattening up the exchange for sale is probably not part of the Furse strategy. But she will be under no illusion that her customer base and her shareholders are beginning to have differing interests.
A further complication is that small, slow-growing customer companies – the ones that don’t qualify for the FTSE-250, nor for AIM or techMARK – aren’t as attractive for the LSE as global blue chips or fast-moving new economy stocks.
Will they be overlooked in the rush to attract new business?
How will you restore confidence in the LSE’s management?
So far Furse has been reluctant to say much about her strategy. The balance sheet is being cleaned up with the proposal to repay a #30m debenture early. Furse has speculated aloud that the name, logo and motto of the exchange may all be dispensed with.
The major part of Furse’s strategy is going to focus on running the exchange as a business and pressing ahead with a full flotation of the LSE, whose shares currently trade solely on a ‘matched bargain’ basis via blue-chip broker Cazenove. The London Stock Exchange intends to list itself on the London Stock Exchange – perhaps as early as May. A key component of this strategy, however, is to allow existing shareholders to vote on a resolution scrapping the current 4.9% shareholding limit. The effect will be to subject the LSE to the full rigours of the marketplace, as faced by the other companies listed on it.
As recently as last October, however, not long after the departure of chief executive Gavin Casey, the LSE was setting out in its defence document against the hostile OM Group takeover bid, that the exchange should not head for a full listing because ‘the business is still evolving’, ‘the benefits of the recent demutualisation have not yet had time to take full effect’ and that the ‘immediate priority is to focus on building the business’.
Perhaps it would have been more accurate to say that the immediate priority was to focus on rebuilding the board: developing a strategy, floating and fighting off hostile bids is not something most companies would undertake without a chief executive at the helm.
At the same time as Furse’s appointment was announced, the LSE said it was appointing four other non-executive directors and that four existing non-execs were standing down.
Presumably Furse was involved in that selection process, part of an exercise in sprucing up the board for a full flotation, perhaps.
What partners will you reach to? Or are you building a warchest?
A tie-up with Frankfurt is probably a no-no, unless a different type of proposal can be put together. So is OM Group. Nasdaq is hotly tipped as its European ambitions are obvious for all to see. Euronext, the French-Belgian-Dutch exchange, has been mooted, but probably lacks the clout of a German or US deal, and probably involves a greater cultural gap than would have existed between the Anglos and Germans.
By pressing ahead with a full flotation there must be the possibility the question of ‘alliances’ will be answered by the highest bidder. With a full stock market listing, in fact, the LSE will be able to use its own shares to acquire other exchanges or other businesses.
Moreover, the LSE has cash reserves in excess of #210m, which could provide a sweetener in any takeover deal. The office is worth #100m. The exchange has said it will move by the end of 2004. This may explain speculation that Furse intends to scrap the red and white crest.
On the day Furse started at the LSE, Deutsche Borse floated in Frankfurt. A would-be ally may become a formidable competitor – or even a hostile bidder.
How will your experience prove valuable?
Danish-Canadian Furse, 43, has been involved with Liffe since its foundation in 1983, initially with Phillips & Drew (which became part of Union Bank of Switzerland), latterly with Credit Lyonnais Rouse, where she was chief executive until last December. She joined the board of Liffe in 1990 and was deputy chairman from 1997 to 1999.
– This is an edited extract from an article which will appear in next months Financial Director
More Financial Director articles can be found at www.financialdirector.co.uk
WHAT A DULL PLACE!
A trip to the London Stock Exchange isn’t what it used to be. It’s still the ugliest building in the square mile, but gone are the redeeming features.
It’s no longer possible to gaze on the famous hexagonal pitches on the trading floor. The visitors’ gallery has long been closed, and the floor has become a Knight Securities dealing room.
Gone are the days when the FT-30 index was calculated and displayed hourly, when settlement of trades took place on a single day about a week after the close of the fortnightly account. Gone are the days when the government broker would don a top hat before walking onto the floor to announce a new gilt-edge stock. Back then – and we’re talking about the mid-1980s, believe it or not – it could take almost five minutes to find out the price of, say, ICI, if the floor dealer was sitting in one of the small windowless ‘boxes’.
Gone too are the schoolboy japes. On a slow-trading afternoon, brokers used to quietly set fire to jobbers’ newspapers as they stood reading them. Today, the notice concerning Rule 17, which cautions against the throwing of paper darts, is a framed curiosity in an office on the 19th floor.
Women were allowed onto the floor in the 1970s.In 1986, at the time of Big Bang, the exchange spent millions installing new technology on the jobbers’ pitches. But, within a year of the start of the new order, pitches were abandoned as jobbers became market-makers, sitting in front of screens in offices.
The most exciting activity at today’s LSE takes place in the media centre.
Reporters do live pieces from a building that now has remarkably little to do with the actual business of buying and selling shares.