Hedge Funds Stymie Approaches To The LSE

by Carla Johnson, Investors Offshore.com

15 March 2005

Following the stunning victory of a few, small hedge funds in driving Deutsche Börse to abandon its bid for the London Stock Exchange, the funds are now making it clear that they will oppose Euronext if it offers any price over GBP4 a share - and the LSE wants GBP6.

It was more or less the first time that hedge funds had played such an open and decisive role in preventing a merger, insisting to Werner Seifert, head of Deutsche, that the company should distribute its cash pile to shareholders rather than spend it on a takeover. It is received wisdom that takeovers almost never add value to the acquirer in the short-term, so the hedge funds have got economic logic on their side.

Seifert has acknowledged that the hedge funds' demand for a distribution had been echoed by a number of other shareholders, and said he would develop such a plan.

Deutsche Börse had offered GBP5.30 a share for the LSE, at a total cost of €2 billion, but this bid was rejected by the LSE.

Euronext, a combination of stock exchanges in the Netherlands, France, Belgium and Portugal, which beat the LSE in a competition to acquire LIFFE two years ago, has expressed interest in the LSE, but has yet to name a price.

After Sunday's news, LSE's stock fell 7.8% to 497 pence in London, while Deutsche Börse shares fell €1.33 to €57.07. Euronext surged €1.20 to close at €29.69.

Deutsche's bid collapsed after two hedge funds, The Children's Investment Fund Management of London (TCI), and Atticus Capital of New York, opposing the deal. The funds had increased their holdings in the LSE substantially during the bid period, and now hold 12% of the company. "We intend to be long-term investors in Deutsche Börse," said David Slager, a manager at Atticus Capital. When they were joined by Fidelity and Capital Group in opposing the bid, Deutsche had no choice but to call it off.

TCI is said to have a 'material' holding in Euronext. Christopher Hohn, the managing partner of TCI, said: "It is my understanding that all of the largest Euronext shareholders oppose a price materially above £4 per LSE share. With the LSE apparently seeking £6 there is a wide gap between bid and offer." Under these conditions, it is hard to see how a successful bid for the LSE can be mounted.

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