Jeremy Warner's Outlook: Cash is king as Euronext battles it out for LSE

Tsunami of aid

Jean-Francois Theodore, chief executive of Euronext, is a wily old fox of great ingenuity and negotiating skill, but can he really afford to pay the upwards of £1.5bn of cash he needs to come up with to secure the London Stock Exchange? In a regulatory filing yesterday, the Paris-based owner of the French, Belgium, Portuguese and Dutch bourses said that any bid for the LSE was "likely to be solely in cash". This may be what M. Theodore judges necessary to stay in the game, as the rival bid from Deutsche Börse is all cash and Euronext would need to at least match its currency in order to win, but the announcement produced near incredulity in the City. Euronext is already quite highly geared, and in terms of stock market value, it is not significantly bigger than the LSE.

Of course, any cash bid could be refinanced with equity or quasi-equity at a later stage, but the effect of such a manoeuvre wouldn't be so very different from making an all equity or cash and equity bid in the first place. For present equity holders in Euronext, it might mean even greater dilution. As is often the case with Continental players, M. Theodore's approach seems to be to secure the prize first and worry about the shareholder value later.

The LSE is a unique opportunity and brand, whose acquisition will position the winner as the dominant supplier of equity trading platforms in Europe. But in the end, equity trading is only a business, like any other. If Euronext overpays, the takeover will ultimately destroy a lot more shareholder value than it creates and the new empire, extensive though it might be, will struggle to compete.

For the time being, all three parties to the auction agree that price is the least of their worries. Compatibility and satisfying the customers, not to mention competition regulators, are potentially much more likely stumbling blocks.

M. Theodore likes to think of himself as a better match for the LSE's Clara Furse than Deutsche Börse. The business model is more similar, with a clearer separation between trading, settlement and clearing than exists in Deutsche Börse, the two companies are serviced by the same settlement and clearing houses, and what's more Euronext already owns Liffe, the London-based futures exchange.

Deutsche Börse's Werner Seifert, on the other hand, may eventually want to force his own settlement and clearing systems on to LSE customers. He's already made clear that demerging these activities is not up for negotiation, while his German masters in Frankfurt have also made plain that he is not to move the combined company's headquarters to London. Any such move would cost both tax and jobs and for ever seal Frankfurt's position as a backwater of the financial services industry.

Philosophically then, Ms Furse ought to be more drawn to Euronext than Deutsche Börse, assuming she can put the shame of being outbid for Liffe by Euronext behind her. But in the end it's money that counts, and there's little doubt who's got the greater firepower in any cash shootout.

Tsunami of aid

There is something faintly distasteful about the "mine's bigger than yours" competition being played out among the world's richest nations for supplying the greatest amount of aid to the tsunami hit countries of the Indian Ocean. The outpouring of private giving that this terrible natural disaster has prompted, not least by the readers of this newspaper, has been truly awesome and inspiring in its size and generosity, but we are entitled to be a little more cynical about Government aid, which is hardly ever - unlike private, charitable giving - donated without some kind of ulterior, self interested purpose.

The point was well made by Yao Graham, co-ordinator for the Third World Network, Africa, in a piece he did the other day for the BBC's Newsnight on his native Ghana, generally regarded by the West as the pin-up boy of African nations for the way it has lifted itself out of poverty. He cited the example of Ghana's electrification programme, which is being financed by foreign aid. There is apparently, a perfectly good local producer of electrical wire that meets all international standards, but the aid stipulated the use of a supplier from donor nations. So thanks very much for the infrastructure, but how sustainable is the economic benefit if it wipes out the local supplier in the process?

All too often, bilateral aid is either for the purpose of buying political influence or amounts to little more than pork barrel politics back home, being a way of subsidising hard pressed industries in electorally important constituencies.

American pledges of aid to Indonesia - which have been hugely increased over the past week - are no doubt sincere enough. On the other hand, the fact that this is a muslim country and a tinder box of regional and ethnic divide in one of the fastest growing regions of the world lends American aid a special meaning which other well deserving causes don't necessarily possess. Indonesia is a chance for American to demonstrate to the muslim world what a decent country it really is as it desperately tries to extricate itself from the mess it has got itself into in the Middle East.

All that said, the giving of state aid to the third and developing world is slowly changing for the better, thanks in no small measure to the efforts of our own Chancellor, Gordon Brown. As a consequence it is not as much of a menace as it used to be. Tied aid, under which the money must be spent with donor suppliers, was abolished for poorer nations when Labour first came to power in 1997, and although there is still a fair amount of effective aid given through the Export Credit Guarantee Department to the developing world which plainly is tied to UK suppliers, there is little if any lending by Britain of this type to the poorer nations any more. The aid is either free and unencumbered, or it is not given at all.

What's more, the giving of aid by nearly all nations tends nowadays to be attached to stringent tests as to transparency and accountability. Countries that aren't able to satisfy these tests, such as Zimbabwe, don't get any aid. Gone are the days when the aid would routinely disappear into the local despot's Swiss bank account. The money may not necessarily be spent efficiently; little state spending ever is. But at least it tends to get spent on what it's meant to buy.

The debt forgiveness Mr Brown was again championing yesterday is a related but slightly different issue. Much of this debt is a left over from the bad old days of corrupt and tied aid. For instance, a large part of Indonesia's stock of indebtedness to Britain relates to its purchase of Hawk fighter jets, a programme which was enhanced and expanded under Labour despite Indonesian atrocities in East Timor. Perhaps the old ways are not such a thing of the past as the Government would like to pretend.

In any case, Mr Brown proposes a moratorium on interest and repayments of principle for the tsunami-affected countries of Sri Lanka and Indonesia. This would save these countries approximately $3bn over the next year on their bilateral and multilateral debt, of which about $100m is attributable to Britain. In the case of debt forgiveness, there is very little guarantee that the money so saved will be spent on post tsunami reconstruction, especially in Indonesia, where the devastated regions live reluctantly under the boot of an alien Jakarta government hundreds of miles away in the unaffected south.

Governments plainly do have a role to play in disaster relief, especially through the military, which has proved itself highly effective in getting water, food and medical supplies into affected areas. But that's where it ought to stop. The rest serves only as bleeding heart electioneering fodder for well meaning and ambitious politicians alike. Much better to cut taxes and let the public give their money directly, as it's proved only too willing so to do, than have it channelled through government. Regrettably, no politician is going to let go of the purse strings of influence quite so easily.

jeremy.warner@independent.co.uk