Fool's Eye View

[ October 13, 2000 ]

Danegeld from OM

By Rob Davies (TMFEssex)

Carburton Street, London -- In 991 Brythnoth, the Earl of Essex, was defeated in the battle of Maldon by Olaf Tryggvasson leading a horde of 3,000 Vikings. The English paid the Norsemen Danegeld to stop them doing it again.

But it didn't work. This week Per Larsson, leading of a horde of geeks from OM Group, returned to the Saxon Shore intent on pillaging the London Stock Exchange. In a reverse of the Danegeld it is offering a mixture of cash and shares to the value of £1,064 million to acquire the company that runs the share market for the UK. The board of the LSE considers the offer represents inadequate value for shareholders and offers no proven benefits for customers. We can imagine Brythnoth saying something similar to the Vikings before the set-to when they lopped his head off.

Nevertheless, OM Group does offer a real solution to the problem facing the LSE and deserves some consideration. The revised offer is 1.4 OM new shares for every LSE share or a part share and part cash offer of £20 and 0.5 new OM shares for every LSE share. Under the new terms existing shareholders could own up to 33% of the enlarged group and there would be two independent directors.

Does this really concern us as private investors? Well, yes it does. Ignoring all the xenophobic nonsense, what is it that investors really want? Essentially, their requirements are quite simple. In my view they want:

1) Good price discovery
2) Low transaction costs
3) Security of settlement
4) Timely announcement of news
5) Proper regulation

Taking the last point first, the regulatory aspect has been taken over by the FSA, so it is irrelevant who actually runs the exchange on a daily basis. By far the most important factor for the investor is the need for a large, liquid market that can accommodate heavy trading without moving prices. The way you get that is to have an efficient trading process that is low-cost, reliable and secure. That way traders want to come to that market because of its virtues and that in itself will encourage more volume.

As a result of this the stock market is really a natural monopoly and, for that reason, it has to be treated in a special way to ensure the market runs properly. However, the advent of new technology is changing the old familiar word of trading face to face. In that regard London led the way with its Big Bang in 1996. But the pace seems to have slowed in recent years and the interruption to trading in April this year showed that the exchange is not up the job.

I know little about the OM Group, but the fact that it has been chosen by so many different exchanges to run trading systems suggests that it has the experience to do the job. Its web site is fussy, and takes a long time to load, but the track record of the company does seem impressive. As Brythnoth discovered, it always pays to take the Vikings seriously.