Does it matter who owns the London Stock Exchange, now under siege by Frankfurt’s Deutsche Börse? Yes, it does, and for several different, but interlocking, reasons. In the first place, it matters because of the direct implications for the City. Many – though not all – would support the view that there is scope for European consolidation and cost-cutting among exchanges. Indeed, that process has already begun. But on whose terms?
The initiative for the present £1.3 billion merger attempt, the second in four years, comes from Deutsche Börse. Importantly, Frankfurt’s approach to the business is different from London’s.
Although Deutsche Börse is making conciliatory noises about respecting ‘established market models’ and leaving existing London management intact, this resembles a takeover rather than a merger. Leaving aside the question of which business approach is better for customers, it is scarcely unreasonable over the long term to expect the benefits to be calculated to accrue to the bidder – Frankfurt – rather than the target – London. ‘Bums on seats may be in London, but the brains will be in Germany,’ one insider predicts.
Given the different approaches, the general view in the Square Mile is that in the long term there is room for only one main European financial centre, just as there can be only one headquarters for a combined company; this tips the balance away from London, the present leader, in favour of Frankfurt.
The German bid may, of course, flush out others, which would give a different outcome more favourable to London. Even so, there are other reasons to fret about the bid.
Financial services, after all, are something the UK is supposed to be good at. The continuing pre-eminence of the City of London, and what has been dubbed the ‘golden prize’ of the Stock Exchange within it, is complacently used to justify everything from staying out of the euro to abandoning manufacturing. So what does the possible sale of the jewel in the crown say about City management? As Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers, wrote in the Financial Times , ‘the most astounding part of the story is that the LSE now finds itself in a situation where it is the target rather than the bidder’.
But just as extraordinary is the fact that, in another sense, this is perfectly normal. Although pension and insurance funds remain in British hands, few other institutions of importance in the City are now UK-owned. City investment banks, stockbrokers and fund-management groups are all in foreign ownership.
If that represents ‘Wimbledonisation’ – having the most beautiful grass courts in the world but no tennis players – selling the LSE is like flogging off the All England club as well.
The worrying thing, of course, is that this has happened before. It is a rerun of the trajectory of large parts of manufacturing. The motor industry is emblematic. No one needs reminding that Rolls-Royce and Bentley, along with Jaguar, Aston Martin and Land Rover, have gone the way of volume carmakers, into foreign hands. This is also the pattern in many other industries and sectors of the economy.
In one respect that may actually be an advantage: foreign-owned manufacturing plants in the UK are more productive than UK ones, and there is no doubt that intensive courses in competitiveness at the hands of Japanese, US and continental plant managers have greatly benefited UK plc as a whole. Yet that has not prevented the UK manufacturing sector from shrinking faster than in many rivals.
Its share of the total economy, at around 17 per cent, is larger than in the US or the Netherlands but smaller than France and Italy and considerably smaller than in Germany and Japan. And despite dozens of investigations and initiatives, industry productivity obstinately trails that of France, Germany and the US.
Economists often argue that the move from manufacturing to services is inevitable and makes little difference in terms of wealth creation. But, like many economists’ theories, this is only half the picture. Management counts, too. While economic forces are strong, being blind they can be trumped by clever managers using deliberate strategy. In manufacturing, while the economist is right to say that ‘wage and other costs are lower in India and China’, a manager can counter: ‘But we can organise better to offset that advantage and offer higher-quality goods.’ This is also true of services.
Looked at from a managerial point of view, manufacturing and services aren’t alternatives but part of a continuum. Each trades with, and is dependent on, the other. Likewise, shifts of ownership in manufacturing affect services, and vice versa. Thus, foreign manufacturers buying into the UK often bring their domestic insurers and bankers with them. No big decision about global car advertising is currently taken in the UK.
While it’s not the whole picture, the surrender of large swathes of manufacturing may have contributed to what happened, and is continuing to happen, in the City.
One of the big questions for the future of the economy is whether a country that has proved notoriously poor at managing the complexity of large-scale manufacturing can expect to make a better fist of high-value services.
Anecdotal evidence is that services are way behind manufacturing in work organisation and productivity in general. The hollowing of the City is not reassuring in this respect.
The truth is that the London Stock Exchange has been outthought, outsmarted and outmanoeuvered – outmanaged in fact – by a smarter overseas rival, just like City fund managers and investment groups, electronics and car manufacturers before it. What happens when there’s no more family silver left to sell?
The Observer, 19 December 2004