Hedge funds are manipulating mergers - NYSE

Stephen Foley
Monday 09 October 2006 00:00 BST
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Long-term shareholders in the world's biggest stock exchanges should beware of being bounced into bad mergers by short-term hedge fund investors, the chief executive of the New York Stock Exchange, John Thain, has warned.

His comments come amid another burst of speculation over consolidation among the world's equities, futures and commodities exchanges, and as the NYSE works to cement its merger with the Paris-based Euronext.

The London Stock Exchange is continuing to build defences against a possible takeover by NYSE's rival, Nasdaq, and there are new rumours two of the biggest commodities exchanges - the Chicago Board of Trade and the London Metal Exchange - could begin informal talks this week.

Shareholders in Euronext have been told by the NYSE's brokers about suspicions that hedge funds may have been helping Deutsche Börse in an effort to flatter the price of the German bid for Euronext in comparison to that of the NYSE. A spike in short-selling, which pushed down NYSE shares in the summer, coincided with share buy-backs by Deutsche Börse which underpinned its own share price.

And Mr Thain said the animus for a Deutsche Börse-Euronext deal was mainly coming from hedge funds, such as TCI, which hold stakes in both companies, with little thought for long-term value creation.

"You have to remember that TCI has a very, very large stake in Deutsche Börse, and their biggest concern is how to get out of that. They don't want to be stuck with that. But what is good for TCI is not necessarily good for Euronext or for its other shareholders," he said.

"Werner Seifert, when he was Deutsche Börse chief executive, wanted to buy the London Stock Exchange at 530p per share, and that would have created one of the most successful and powerful exchange business in the world. In today's world he would look like a genius, but he got fired - by TCI."

Both sides in the stand-off between Nasdaq and the London Stock Exchange believe hedge fund operators are the source of market rumours and stories about the companies' likely next moves, including whether Nasdaq will move quickly with a new bid and whether Clara Furse, the chief executive of the LSE, has identified a "white knight" counter-bidder. The LSE believes between 20 and 30 per cent of its shares are held by hedge funds, but has had to piece together details of its owners because many hide behind trading accounts at the big investment banks. Mr Thain added that a takeover of the LSE by Nasdaq would "help Nasdaq a lot, but be negative for London".

Hedge funds have been agitating for an early cash offer from Nasdaq, which has 25 per cent of the LSE, but will have to bid at least 1,243p per share if it moves before spring. A newspaper report at the weekend cited LSE investors who said they had been canvassed by Nasdaq on whether they would accept an immediate 1,243p-a-share offer, but Nasdaq said the report "implies a degree of proactivity on our part which we simply do not recognise".

The LSE has been considering seeking a white knight, and may also seek to join the NYSE-Euronext combination.

Now exchange industry insiders are predicting commodities exchanges could join in the wave of consolidation after the boom in commodities and futures trading sent their shares to record levels.

The Chicago Board of Trade, whose stock hit an all-time high on Friday, is examining strategic deals, but declined to comment on a report that it would bid for the London Metals Exchange. A spokeswoman for the LME said: "We are not talking to anyone at the moment."

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