Europe's Share Mantra

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If om gruppen had applied for a listing on the London Stock Exchange in the not too distant past, it's the kind of company that would have been politely shown the door. After all, it's not an established manufacturer; its revenues depend largely on high technology; and its shares trade at stratospheric levels compared to earnings. But in a David and Goliath parable of high finance, the upstart Swedish company last week offered to buy the venerable London Stock Exchange, the world's oldest share market. The hostile, $1.2 billion bid rocked the City, London's tradition-bound financial district, and cast into doubt a planned merger between the London and Frankfurt exchanges. The proposal forced the London exchange to put off indefinitely a scheduled Sept. 14 vote on the merger with Frankfurt and signaled the start of yet another round of tangled negotiations aimed at consolidating Europe's stock exchanges.

The irony of the Swedish bid is that OM Gruppen always said it wanted to end the monopoly of old-fashioned national stock exchanges and now proposes to buy one as the basis for a pan-European, computer-driven trading platform. Founded in 1985 by visionary Swedish trader Olof Stenhammar, OM owns the Stockholm exchange, and likes to point out that it has been operating for-profit exchanges for 15 years, while Frankfurt has been profit-making since 1990 and London only since July. About a third of OM's annual $236 million turnover comes from providing computer trading platforms to commercial exchanges in 20 nations. The rest comes from operating actual exchanges in London and Europe, trading such diverse commodities as paper pulp and electrical power. Stockholm's $300 billion total market capitalization pales in comparison to London's $2.6 trillion, but it is nearly as profitable, earning OM $73 million last year, compared to London's $79 million.

And while the London Stock Exchange struggles to modernize, OM keeps redefining the world of financial exchanges. A high-tech innovation called Norex has created a joint computer platform for shares on the Stockholm and Copenhagen markets, with exchanges in Oslo, Iceland and the Baltic nations slated to join the linkup later this year. But the real wave of the future may be something called Jiway, a partnership with U.S. investment bank Morgan Stanley Dean Witter, which is expected to go online this November. Jiway will allow retail investors throughout Europe to buy from among 6,000 different European and U.S. shares for as little as $6 a trade, compared with $100 or more common with conventional brokers. "The market for cross-border European shares hardly exists today because it is so expensive to trade," says Niklas Midby, executive vice president of OM Gruppen.

Ever since the euro was introduced as the common European currency for financial transactions, investors have awaited a rapid consolidation of Europe's 15 separate national stock markets. When an Italian investor wants to buy French shares, he has to pay huge transaction costs for the cross-border trade. There have been at least three attempts to merge Europe's share exchanges, but all have fallen flat because of national rivalries.

Last May, the race appeared to have gone to Europe's two biggest exchanges, London and Frankfurt, which announced a merger of equals to form a new company called iX. But under the plan which emerged from negotiations between the two entities, iX would have been carved up into a blue chip exchange in London regulated by British authorities, while growth stocks traded in Frankfurt under German rules. The resulting confusion had left a number of British stockbrokers, owners of the London exchange, underwhelmed by the London-Frankfurt marriage.

The management of the London exchange dismissed OM's offer of $39 a share as "derisory," and investors are unimpressed because the bulk comes in OM stock, not cash. But OM's offer exposed the weakness of the linkup with Frankfurt, and prompted Rolf Breuer, the CEO of Deutsche Bank and chairman of the Deutsche Börse, to hint the German exchange might offer to buy the lse in alliance with the Milan and Madrid exchanges. Or a new suitor might emerge such as Euronext, the rival pan-European stock market being cobbled together from the Paris, Brussels and Amsterdam exchanges. Regardless of how the current battle finally ends, the bold maneuver by OM sounds the death knell for old-fashioned national exchanges in Europe. When a rival can come along and offer cheaper and better service on a computer screen, customers who buy and sell shares are bound to wonder why they should still do business the old way.