Press releases 2000
14 September 2000
London Stock Exchange Annual General Meeting
The following is the text of a statement by Don Cruickshank, Chairman, to the Annual General Meeting of the London Stock Exchange on Thursday 14 September 2000 at 12 noon.
People ask me : why did you take on this job? Well, the answer is that I spied in the pre-demutualisation Exchange of March this year - just six months ago - opportunities for a commercially driven exchange to be the market leader, to build on its existing strong position, and to move forward to participate successfully in the fast advancing globalisation of trading. It looked a very valuable business.
It is also a job worth doing. The Exchange was no longer to be seen as a public institution. But it was still to be central to the economic health of the UK and our ability to compete in Europe, and for Europe to compete on the world stage.
Six months later, that stands true and my commitment is undiminished. It is absolutely right that your company, as a commercially driven organisation, can better serve all its customers than the mutual that preceded it. You know, however high the quality of the management, whatever the rules of an industry mutual, such an organisation just can't be run in the interests of all its diverse members. So, for members to vote for a commercial exchange was absolutely right.
And, for some time, there have been healthy indicators of a successful for-profit commercial organisation with a thriving business. Equity turnover on our markets has grown steadily by 18% per year during the last decade, with average daily bargain levels now running at 140,000 a day. On AIM, the number of trades by August this year was already double that of the whole of last year. The AIM index outperformed all the world's key indices during 1999 with growth of over 140%. Since its launch last November, techMARK has grown from 180 companies to 230, raising nearly 8 billion by August this year. And we are the most international stock exchange in the world.
I am pleased to report that turnover for the group has increased over the last three years from 146 million to 176 million, a compound annual growth rate of 10%. Over the same period, profits before tax have grown sixfold - from 8 million to 49 million - an increase in earnings per share from 22.9p to 114.1p for the year ended 31 March 2000. This has been achieved in part through effective cost control, in other words, management driving up margins.
The company enjoys a strong balance sheet which is underpinned by healthy cash reserves and its property, which provide a sound platform from which to finance future growth and investment.
And as part of our commitment to enhance our markets, we have recently launched a market for Exchange Traded Funds and are continuing to develop our trading technology. On February 26th next year, we are introducing a Central Counterparty service. This initiative, in conjunction with CRESTCO and the London Clearing House, will make a significant contribution to reducing risk and, in the longer term, will bring down the cost of trading.
At this point, may I say thank you to our staff, not only for the valuable contribution they have made to this success, but also for their hard work and perseverance during what has been a turbulent time for us all.
We have been busy, actively developing a profitable, growing business.
Our position is a strong one. We have a good name and reputation and the integrity that goes with it. But to make sure that we retain and exploit our leading position, we must be proactive in anticipating economic trends around the world: globalisation; deregulation; demographic changes leading to developments in the equity culture across Europe. The trends that are driving the move to a single capital market in Europe: a move in which it is absolutely essential that your company participates.
Essential for you as shareholders; and essential for customers who will benefit from lower cross-border trading costs; cheaper capital; easier access to investment opportunities. These benefits will not all flow from the actions of exchanges. Most will flow from the indirect ripple effect across the rest of the high cost base in clearing and settlement, and from the necessary harmonisation of regulation. But commercial initiatives by exchanges are the necessary catalyst for all this.
For the London Stock Exchange there is no point in being anything other than the market leader, in whatever way and however quickly that develops. That is where liquidity will be.
Any other vision is wrong. The merger with an organisation such as the Deutsche Borse could have been right, providing the opportunity to create a European market leader in scope and scale of business, and to drive forward helpful change. And incidentally, creating a UK company headquartered in London, with UK corporate governance and with its senior management team in London.
And yet, as we announced on Tuesday, that merger has had to be withdrawn. We remain convinced that the strategy is the right one. It's worth while re-stating what it is:
- building on the strengths of our existing businesses, including the quality and reliability of our trading and information services and our innovative and flexible approach to the development of market structures and services, in order to enhance our strong competitive position in the UK and internationally;
- continuing to invest in the development of new products and services, in order to enhance our position and grow our revenues;
- continuing to manage costs effectively; and
- playing a leading role in the development of the European and other international equity trading markets, on the basis of the Exchange's strong financial position.
That was not written last night, or in the wake of the merger, or the OM bid. It is word for word from the Information Memorandum on which you voted almost unanimously for demutualisation. What is problematic is the implementation of a strategy that depends so heavily on factors outside our direct control. As for the merger, there were too many complex issues still outstanding and we have concluded that it is a step too far in the current situation.
In withdrawing from the proposed merger, we have responded to concerns that broadly have two sources.
The first is the impact that the consolidation of exchanges would have on the legitimate business interests of our customers. At one level, that is a feature of all major change and can usually be set aside if there is confidence in leadership. (I'll come back to this in a minute.) However, it's also about real practical issues. And while your management has set about dealing with the generic problems of European consolidation, we haven't been able to make enough progress.
However, significant progress has been made during the last few months. We have been able to give a realistic commitment not to raise the cost base of our customers - indeed a real prospect of reducing it. On clearing and settlement - where so much cost currently resides - CREST and Clearstream have given a commitment to domestic prices for cross-border trades.
And harmonisation of regulation has commenced.
In some businesses that might be enough. But as Chairman I have to say that it isn't enough here. For, in addition to being constrained to a bid timetable, there is the question of leadership, in particular confidence between the company and our customers - especially private client brokers.
Earlier in the year you voted overwhelmingly for the Exchange to demutualise. You recognised the need for a commercial organisation to respond to the pressures of a competitive business environment.
We have made the transition from mutual organisation to a for-profit-company. And as you know, we moved swiftly onwards to a merger proposal.
But - inevitably you may think - we have carried with us too many of the attitudes of the past - often reflected in the relationships between the Exchange and its customers. As I have visited shareholders, there is generally a welcome for me - typically couched in terms of 'nice to meet the Chairman' and a general welcome for the strategy. But too often I have found that consideration of current plans is coloured by the past. And there is too often a scepticism as to whether it will change, especially if management's energies are focused on Europe and the world.
What to do? Defer major change until the new company's commercial freedom and attitudes have had time fully to be recognised? That would have been wrong for the company. The London Stock Exchange - like everyone else - just has to seize the tempo of change across financial markets. So we find ourselves faced both with the challenge of dramatic strategic shift and of improving customer service in the UK.
The strategic direction is clear. Our summer of dialogue - we have discussed the company's future with well over 2000 people - has confirmed the strategic direction we all agreed in March.
And, in addition, we have made a commitment that we will execute this strategy only in full consultation with shareholders and customers.
Already, then, one thing is clear. We believe it is clear that the OM offer fails totally to satisfy customers, as well as offering exceptionally poor value for one of the leading equities' markets of the world. Your company's first detailed defence will be made in the course of the next ten days.
In the meantime, we shall continue to work on communicating better and on building trust between the company and its shareholders and customers. Warm words will not do. It's about delivering what we said we would - whether it's something directly within management's control, like improving the efficiency of our markets, or whether it's not directly within management's control, like cross-border settlement costs.
I am equally concerned to address issues surrounding private clients and those who serve and advise them. I should like to focus also on developing further our successful national markets, including AIM and techMARK. I know that there are concerns in these areas, including poor liquidity for many smaller companies, and I look forward to a dialogue with APCIMS at their conference on 7 October.
For today, I have several important statements about the governance of your company.
First, the composition of the board. We are committed to the UK corporate governance model - a commitment made at the time of demutualisation but on which action was deferred during the merger debate. The search for a suitable number of independent non-executive directors, in accordance with the Combined Code, will be a priority for me and the appointments committee of the board.
Second, the structure of the consultation process that will replace the committee structure of the old exchange. A senior markets group will be restructured and its membership widened. With representatives from investors, companies and advisers - large and small - and private client brokers, it will be fully and effectively connected to the board. This new group will be the main, but not the only mechanism for this deeper dialogue with customers and shareholders about the execution of company strategy.
At the time of the demutualisation, we put in place a shareholding limit of 4.9% in the company. This was set to ensure diversity of ownership whilst the Exchange's business evolves and the consequences and benefits of demutualisation have time to take full effect. OM would need to have this restriction waived for their offer to succeed and they have asked shareholders to help to call a shareholder meeting to remove it.
We will not hide behind the 4.9% limit to thwart OM's bid. Your Board intends to convene a shareholder meeting in due course so that shareholders can decide for themselves, in respect of the OM offer, whether or not the 4.9% restriction should be lifted. Shareholders need not therefore return the EGM requisition form as requested by OM.
With regard to trading in recent months, you will be aware that trading volumes on the London Stock Exchange (an important component of our revenue stream) have continued at high levels - around 140,000 bargains per day. We will be reporting our full interim results in due course and announcing our first dividend. In view of the current offer period we are reviewing the timing of their release which would normally happen in late November.
We're building on a fine track record. This is a strong company, the most international of all exchanges. It doesn't have to do deals. It may. But it doesn't have to. It will be developed to be stronger and it will participate in merger and consolidation at the right time. Above all, the London Stock Exchange, your company, is not up for sale.
Schroder Salomon Smith Barney and Merrill Lynch, which are regulated in the United Kingdom by The Securities and Futures Authority Limited, are acting for London Stock Exchange plc and no one else in connection with the offer by OM and will not be responsible to anyone other than London Stock Exchange plc for providing the protections afforded to their respective customers or for providing advice in relation to the offer.