Hedge funds linked to merger rumours

LONDON - 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 has warned.

John Thain's 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 Borse 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 northern summer, coincided with share buy-backs by Deutsche Borse which underpinned its own share price.

Thain said the motivation for a Deutsche Borse-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 Borse, 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 Borse 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 businesses in the world. In today's world he would look like a genius, but he got fired - by TCI."

Both sides in the current 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 LSE chief executive, has identified a "white knight" counterbidder.

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.

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 1243p ($35.45) 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 1243p-a-share offer, but Nasdaq rejected the report.

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

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.

Chicago Board of Trade is examining strategic deals, but declined to comment on a report that it would bid for the London Metals Exchange.

An LME spokeswoman said: "We are not talking to anyone at the moment."

- INDEPENDENT