LSE board backs Furse to pursue (pound)400m Liffe deal Margareta Pagano - 30 Jul 2001 The London Stock Exchange board has backed Clara Furse , chief executive, to press ahead with her plans to buy Liffe , the London International Financial Futures and Options Ex- change. It is understood to be willing to pay up to (pound)400m At a board meeting of the LSE last Wednesday, Furse gave directors a presentation outlining why she is convinced that putting the cash and derivatives markets together is crucial to both exchanges. A source said the presentation was well received and Furse has received the go-ahead to take the proposals further. The LSE has appointed third-party independent advisers to undertake due diligence on Liffe's business. Its usual advisers, Cazenove and Schroder Salomon Smith Barney , are not involved at this stage. The LSE is understood to have accepted that it may have to pay about (pound)15 a share, valuing the futures markets = at some (pound)396m, a signi- ficant premium on the present price of 860p. Furse, a form- er Liffe director, knows that she will have to pay this premium if she wants a bid recommended by Liffe's big share- holders and the board. The LSE declined to comment. The LSE is also exploring with Liffe how they can work to- gether on technology to reduce costs for their customers, many of whom are the same. Liffe has its Connect trading system, which can be used for equities, but it has also many other technology packages which can be used by the LSE, and vice versa. The LSE's Sets trading system needs upgrading. These talks are likely to continue irrespective of whether there is a formal merger. Furse also told the board that if the LSE is not successful in its bid to buy Liffe it will develop its own derivative products. Furse has been sounding out Liffe's influential shareholders to see whether they are in favour of a take- over, and at what price. There has been almost unanimous agreement that an offer would have to be pitched between (pound)12 and (pound)15 for it to be approved. Liffe's big- gest shareholders include the US venture capital groups Blackstone and Battery , which together own 29.4% and are thought to be ready to take a turn on their shares for which they paid (pound)6 in a placing last autumn. After her lengthy discussions with Liffe investors, Furse is understood to believe that, if an offer is pitched at the appropriate level, she has support from at least 50% of the shares. The LSE could easily afford Liffe. It has (pound)200m cash in the bank and could pay the balance with a n= ew share issue now that its shares are listed. Furse and Don Cruickshank , chairman of the LSE, have also been sounding out the LSE's shareholders and have found a groundswell of support for a takeover of Liffe. Furse has been in talks with Sir Brian Williamson , chairman of Liffe, and Hugh Freedberg , chief executive, since she took over at the beginning of the year about the options available to the two markets. One of the sticking points of a merger could be the future positions of Cruickshank and Williamson. Williamson turned down the chance of becoming chairman of the LSE last year because he felt he had enough work to do at Liffe, but also because of the proposed iX deal with the Deutsche Borse , which he was strongly against. Many in the City of London would favour Williamson taking the top job because of his success in turning around Liffe after it was nearly destroyed by Eurex , the German-Swiss derivatives market. Under Williamson Liffe has returned to profit, making pre- tax profit last year of (pound)12m. Trading volumes have been boosted because of new products and it is enjoying re- lative success in selling its Connect system to other mark- ets such as Tiffe , the Tokyo futures exchange. A merger between the two exchanges would also give the LSE access into the US market through Liffe's new joint venture with Nasdaq for equity derivatives, which will use the Con- nect trading platform. This venture has been set up to trade single stock futures, when it becomes legal in the US later this year, and will include the most actively traded equities on US markets and exchanges. The US regulators are soon to decide on the tax regime and the margin requirements for investors but this market is seen as potentially enor- mous. Critical to any deal would be the support of large investors such as Liffe non-executive directors Roger Carlsson , whose FCT Pacific Equity and FTC groups together control 6.4%, Dr Richard Sandor , who represents Battery, with 1%, and Gidon Hertshten of GH Financials , who controls more than 627,000 shares. Icap , the derivatives broker run by Michael Spenc- er , owns nearly 5% and wants to work closer with Liffe on interest-rate, fixed-income products. On Friday Spencer said he remains opposed to a LSE deal on principle because he does not believe it will add value to either exchange but said that at (pound)15 a share he believes Furse may pull off the deal. Liffe and Icap recently launched the successful Swapnote product and he has further plans to develop Liffe's fixed- income derivative products. The balance of Liffe shares are held by a mixture of locals, independent futures traders and international banks such as HSBC , Barclays and UBS Warburg . Many of these also own shares in the LSE. Meanwhile, Furse bought another 50,000 shares in the LSE last Wednesday as the shares fell sharply from the 397p listing price to Friday's 318p. This takes her stake to 184,460 shares, or 0.062%.