Frankfurt’s new battles

After weathering a protracted economic slump, mass bank industry layoffs and unpredictable money markets, Germany’s banking capital Frankfurt is facing new challenges in its drive to become a global financial centre.

The prosecutors’ investigation follows allegations of a EUR 20 million real estate scandal involving bribes, money laundering and tax evasion; Deutsche Boerse’s shareholders are becoming increasingly vocal in their opposition to its plans for the LSE.

Both developments have the potential to cast a shadow over Frankfurt, which has struggled in recent years to fulfil its long- held ambitions of emerging as a world financial centre to rival London, Tokyo and New York.

“We are of the opinion that the management board of Deutsche Boerse, by proceeding with the contemplated transaction, and the supervisory board of Deutsche Boerse, is acting in breach of its fiduciary duties owed to the company and to its shareholders,” wrote one hedge fund shareholder in a terse letter to Deutsche Boerse chief Werner Seiffert.

Apart from a stepped up campaign by dissident shareholders over its takeover plans for London, Deutsche Boerse is also locked in a battle with rival Paris-based Euronext to win over the London market and to lead a round of consolidation among European bourses.

Euronext already operates the Paris, Amsterdam, Brussels and Lisbon bourses with both Euronext and Deutsche Boerse hoping that a successful takeover would allow them to introduce more economies of scale and consequently cut fees and boost business.

This week Euronext unveiled details of its bid for the LSE, claiming it would result in savings through synergies of EUR 203 million a year, which would be about double the EUR 100 million planned savings envisaged by Frankfurt.

Either way, a takeover has the potential to create the world’s second largest stock exchange after Wall Street.

As tensions over the takeover battle have grown there has been increasing talk that the only way the issue might be settled is for one of the parties to launch a hostile move with a bidding war for the 300-year-old London market expected to start at about two billion euros.

But the stakes are high in the fight for London, with Deutsche Boerse’s planned bid having already set alarm bells in Berlin among government ministers about the threat posed to Frankfurt’s status by the stock exchange’s push to acquire the LSE.

Even if Frankfurt did emerge victorious there are concerns in Germany that it may be forced to ship some of its operations across the channel to the City of London.

A loss for either Frankfurt or Euronext would mean relegation to a second division of European bourses.

Something of an Anglophile, Seifert has been one of the leading campaigners for closer ties for a common European share trading platform.

But a previous bid by Deutsche Boerse in 2000 to try to grab London failed. What is more, London, while willing to talk with Frankfurt,  has so far appeared somewhat unenthusiastic about its proposed offer.

As its stands now the battle for London could also pave the way for renewed pressure on smaller European bourses such as Madrid or Milan or stock exchanges in the new Central European EU states to join one of the bigger groups, which could also boost European bourse consolidation.

In the meantime, however, Frankfurt is bracing itself for revelations in the property scandal that has already drawn some of the biggest names in the city’s property and fund management business into the prosecutors’ investigation net. Prosecutors have already pointed to evidence of bribes involving 30 properties in Germany and the Netherlands.

Central to the case are claims that DB Real Estate, an offshoot of Deutsche Bank and Deka, accepted bribes in exchange for buying up real estate for their fund management operations at inflated prices.

February 2005

[Copyright Expatica 2005]