The London Stock Exchange's announcement last week that it had hired one of the foremost communicators from the in-house financial world appeared to signal the beginning of the stock market's fightback.
News of Paul Kafka's appointment to the souped-up role of director of corporate communications and public policy certainly seemed timed to give a warm feeling to investors studying last Thursday's positive preliminary results.
But as with so much in the LSE's recent turbulent history, things did not run quite so smoothly. Almost simultaneously, Paris, Amsterdam, Brussels and Lisbon exchange Euronext announced a plan to offer trading in most liquid UK stocks, including FTSE 100 companies. The move eclipsed the LSE's 12 per cent rise in profits and plans to return £128m to shareholders, while adding fire to a bitter rivalry between two of Europe's biggest exchanges.
The rivalry dates back to 2001 when the LSE lost the London International Financial Futures and Options Exchange (Liffe) to Euronext in a damaging takeover battle. In March, Euronext responded to LSE plans to offer trading in Dutch company stock from next week, announcing that it would cut fees for trading in these companies by up to 30 per cent.
Kafka, who declined to comment before he takes up his post, has all this and more to look forward to when he steps into the LSE's new offices in the City's Paternoster Square in August. But there is a great deal more to sorting out the LSE's communications than fighting takeovers more effectively.
'The LSE's basic problem is convincing the market that it has a credible strategy,' says Citigate Dewe Rogerson managing director Patrick Donovan.
'On the one hand, the LSE is positioning itself as the pan-European exchange, while on the other it is handing back to shareholders the money it needs to do this.'
LSE press office head John Wallace argues that the strategy is not inconsistent because the exchange retains £100m on its balance sheet and has access to a £300m credit line. He also points out that the organisation could make a future acquisition with a combination of cash and shares.
Whatever the truth about the LSE's message to the City, the exchange is subject to the consolidation question that hangs over Europe's three major exchanges - the LSE, Deutsche Borse and Euronext. Most market observers agree that two of the exchanges will have to merge at the expense of the remaining market, but while uncertainty remains, a price war has set in.
The LSE's track record on finding a partner to secure its position has not been good (see chart and box), and even before the exchange went public in July 2001, it had to abandon an agreed merger with Deutsche Borse to fight off an unsolicited offer from Swedish rival OM Gruppen.
Some observers argue that the LSE has got itself into this rut with the City through a comms policy that has been almost entirely reactive. This approach - exemplified by chairman Don Cruickshank's robust defence of chief executive Clara Furse after press criticism that followed the Liffe debacle - has undermined, rather than promoted, the brand on which the exchange needs to capitalise.
'The LSE has not encouraged the kind of broad City following you would expect a company of this stature to have. It has to develop a profile for itself because the man in the street doesn't understand what it does and thinks it's still all about bowler hats and brollies,' says one City PRO.
Wallace counters that the reams of coverage that the exchange gets shows that 'we punch above our market cap', but concedes 'there is scope for Kafka' to improve communications.
At a time when cash-rich emerging market companies in Russia and the Far East are increasingly looking to tap into European stock markets, defining what the LSE is about and where it is going has never been so important.
But here the LSE suffers from what some argue is a residue of the mutual status it held for 200 years before its full stock market listing. Companies from emerging markets could find the market rectitude that defines the LSE brand too inflexible for their needs, although the exchange is actively courting these markets, with marketing director Martin Graham touring China this week.
Room for improvement
The Association of Private Client Investment Managers chief executive Angela Knight argues that in spite of the LSE's best efforts, the organisation sometimes fails to be inclusive for all its members and adapt to their needs quickly enough. 'Although the LSE does have a consultative process by committee, there is still a tendency to make decisions and tell stakeholders about them afterwards,' she says.
Knight also points out that established exchanges are being undercut by new-technology companies offering themselves as alternative intermediaries, such as virtual exchange Virt-x, which brokers can use as a cheaper method of transparency reporting.
The ability of banks to set up their own virtual trading and settlement networks has also called into question the need for stock exchanges. Organisations like the LSE are no longer just open markets in which to buy and sell securities - they are also technology providers. Set against all this is the LSE's undoubted status as a national icon, something that its nearest rivals lack. But this prestige is a double-edged sword, giving the LSE an internationally respected image at the same time as creating an impression of out-of-date inflexibility.
The market has moved on and, as Knight explains, has different priorities: 'Membership of the LSE no long carries with it an international cachet that you would want to put on your letterhead. This cachet is no longer seen as relevant to businesses' operations when it is much cheaper to resign and use one of the new intermediaries.'
Defining what membership of the LSE means is bound to preoccupy Kafka. Anything else could well be a regressive distraction.
- Euronext Unified exchange of the Paris, Amsterdam, Brussels and Lisbon
stock markets. Beat the LSE and Deutsche Borse in the battle for Liffe
- Deutsche Borse Frankfurt-based stock market. Planned iX merger with
the LSE in 2000 fell through after a hostile bid from OM Gruppen. Tried
and failed to acquire Liffe. Indicated that it is prepared to make big
acquisitions in Europe
- OM Gruppen Founded in 1985 and owner of the Stockholm Stock Exchange.
LSE shareholders rejected OM's 2000 bid, but they formed a derivatives
joint venture, EDX London
- Nasdaq New York-based stock market specialising in technology stocks.
Held merger talks with the LSE in 2002