Nicholas Watson in Vienna -
"It did not work out for anyone," retorts Dr Michael Buhl when asked why, contrary to expectations, the Vienna Stock Exchange, which he heads, did not lead any consolidation of the region's stock markets.
That's certainly true. Like many seemingly ineluctable processes in Central and Eastern Europe's development, the merging of the region's relatively small and immature stock exchanges has suffered several false starts, not least because of rising nationalism - exemplified by the election in Poland of the Kaczynski twins, who saw Warsaw's stock exchange as a strategic asset - and the tendency for some owners of the exchanges to prefer being big fish in small ponds. Eventually, though, hype gives way to reality and that time, Buhl believes, has come.
The first evidence of this will be the expected announcement by Slovenia's stock exchange at the end of June of whether Greece or Vienna has been picked as the bridegroom. After four rounds of bidding, the Ljubljana Stock Exchange is basing its final decision between the Vienna Stock Exchange (VSE) and Hellenic Stock Exchange primarily on price, but Buhl is confident that his offer will be helped by the close cooperation between the two exchanges built up over many years.
"The trust and cooperation we have built up over the years has helped us in the bidding for Slovenia," says Buhl. "There are no Greek companies listed on the Slovenian exchange and we're seen as having done a lot with and for the region."
That cooperation can be seen in the announcement on May 13 that around €225m has been invested on the Ljubljana Stock Exchange over the years through the inclusion of Slovenian stocks in the many indices of the VSE. These indices - of which 23 have a clear focus on a country, region or sector in CEE - are a central pillar of Vienna's strategy to strike up partnerships with other exchanges, which may eventually lead to some kind of tie-up. Buhl claims that over 80% of all trading in structured products worldwide relating to CEE is based on his bourse's indices. Much of the investment into Slovenian stocks was made via the structured products and exchange-traded funds that have been issued by banks on the nine CEE indices of the VSE that contain Slovenian stocks. One of those indices, the VSE's South-East Europe Traded Index, has its highest weighting, some 38%, in Slovenian stocks.
Reasons not to be cheerful
Buhl believes that Slovenia represents just the beginning of a new phase of the long-overdue consolidation of the region's exchanges. And, ironically, it's the very success of many of these stock markets over the past few years that will actually drive this process.
The past five years have generally been good to the region's stock markets. Turnover on the VSE, for example, is now 10 times what it was just five years ago; the Warsaw Stock Exchange (WSE), Vienna's great rival in the region, has seen its turnover rise over 650% over the same period. However, the impact of the global credit crunch on the region's financial markets, while generally mooted, could never be completely avoided.
"We've been hit this year from the sidelines as bigger US investors have taken some nice profits to pay down losses at home," says Buhl. "New possibilities are coming up as volumes at the exchanges have been falling over the last couple of months - already we're seeing signs that exchange owners want to take advantage of the last few years as a good basis to start talks, as 2008 looks less nice for business."
First up could be the Bulgarian Stock Exchange-Sofia, which following a flurry of IPOs and healthy trading volumes in the lead-up to the country joining the EU has enabled it to leapfrog Budapest, Warsaw and Prague and even Italy in terms of market cap/GDP. The Bulgarian state retains a 44% stake in the exchange, but this will need to be sold if the exchange wants to make the necessary investments to meet the growing demand from investors for its services and products.
And then there's the WSE. Poland exemplified the rising nationalism and consequent reluctance by some governments to give up control of their exchanges over the past five years, which was central to holding up the process of consolidation. Under the previous right-wing Law and Justice government headed by the nationalistic and slightly weird Kaczynski twins, the entire privatisation process ground to a halt. However, the current centre-right Civic Platform government has embarked on a massive programme to sell off the state's shares in 740 companies, including the WSE, in which the state holds a 98.8% stake.
The WSE's shareholders agreed at a meeting on May 22 to kick-start the privatisation process, which will involve an IPO in October of less than 50% of the exchange's equity to individual investors and domestic financial institutions. While this is a step in the right direction, it's not enough for the VSE. "The Polish state will still have over 50%, so it's not very attractive - they need to put a bit more flesh on it," says Buhl.
That's unlikely, because the WSE has made it clear it intends to compete, not cooperate, with the VSE as it vies for regional supremacy and looks to tie up with a top-tier exchange like Euronext, London or Moscow.
The WSE has certainly made huge strides over the past five years and presents itself as the rising star among the region's exchanges in contrast to the VSE, which is portrayed - in much of the regional media at least - as a fading force. The equity market cap of the WSE at the end of April was €127bn, close to the VSE's €153bn. And the WSE signalled its intention to compete with the VSE in acquiring other exchanges when in February 26 the WSE's head, Ludwik Sobolewski, confirmed his interest in buying a stake in the Ukrainian Stock Exchange, which the government is talking about privatising.
The WSE has also made progress with its "WSE IPO Partner programme," which teams up with other exchanges in order to attract foreign issuers. The WSE's cooperation with Ukraine's stock exchange has already attracted several issuers and on May 27, it signed its 11th IPO Partner, the Belarussian bank Priorbank. In terms of the number of IPOs, the WSE is winning hands down. In 2007, Poland had 81 new entrants, second only to the London Stock Exchange with 99 IPOs. The VSE had just seven IPOs last year. So far this year, the WSE has hosted 18 IPOs. Buhl counters that the VSE's seven issuers on his exchange raised more money than the many small ones on the WSE. "The average raised there is €12m, ours is more like €40-50m," says Buhl. "Strabag alone raised about €1.4bn."
Buhl also points to the egregious rule in Poland that domestic funds must invest 95% of their cash in Polish stocks - a stipulation that has to contravene EU regulations. "I've been waiting for over a year for someone to start looking at this topic from the EU standpoint. This is quite problematic to put it diplomatically," he harrumphs.
Still, if the VSE is to triumph in a head-to-head battle with the WSE for regional dominance, it needs to do better than its first attempt at regional consolidation when Buhl's predecessor organised the acquisition of a 68.8% stake in the Budapest Stock Exchange in 2004 with a group of Viennese banks. Since then, the Hungarian exchange appears to be going through a kind of reverse process of what is happening with other exchanges in the region, whereby it's losing companies (now just 48 listed) and its volume is dropping - total turnover was down almost 40% in April from the year before. "The BSE is suffering from what is happening on the economic and political side of the country. 15-20 years ago in Hungary they did not do their homework and the transformation side of things because they were so far ahead of other countries," says Buhl.
The government is, finally, making efforts to raise the profile of the stock exchange by privatising some remaining state companies on it and bringing in more retail investors. "But looking at the companies it plans to sell, there's still some way to go," sighs Buhl.
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