A heated exchange
3 April 2006
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12 June 2006
The London Stock Exchange's (LSE) head of legal Catherine Johnson has one hell of a poker face.
Johnson appears relaxed and collected for someone who has been at the front line of a tactical defence strategy that has successfully prevented a string of aggressive foreign takeover attempts. But understandably, she is keeping her cards close to her chest.
While the French, the Germans, the Australians and even the Americans have all made their play for the exchange, it is anyone's guess as to which foreign flag the LSE will eventually operate under.
"It's non-stop," says Johnson. "I don't think anyone in the market would be surprised by the fact that we're the target of takeover bids. It's been very full-on and I'm always on call, but I wouldn't have it any other way.
"In some perverse way I like to be at the centre of it all," she adds.
One certainty is that Johnson and her small but solid legal team have a clear vision for the future of the exchange and will play a crucial role in achieving that end.
The protracted battle for the LSE has come full circle during the past two years.
Just 18 months ago, the LSE looked likely to slip into the hands of European exchanges Euronext or Deutsche Börse, but competition issues and Macquarie Bank's hostile bid were immediate barriers.
That all changed last month when Euronext and Deutsche Börse confirmed that they had renewed merger talks after the Competition Commission cleared the way for a possible bid for the LSE, subject to a number of agreed undertakings.
The negotiations between the two exchanges came amid increasing media speculation that LSE chief executive Clara Furse preferred a pan-European exchange operator as opposed to the recent £2.4bn takeover proposal by Nasdaq.
Johnson cannot talk specifics regarding the LSE's strategy, but her actions speak louder than words.
During the past year Johnson has devoted much of her time to representing the LSE's interests before the Competition Commission, which launched an investigation into competition issues surrounding a possible acquisition by Euronext or Deutsche Börse.
Johnson was vindicated last month when the commission agreed with the LSE's arguments and ruled that the deals would only get the green light if the potential buyers agreed to reduce their control over LSE clearing house LCH Clearnet in the event of a merger.
Likewise, the commission stated that the bidders' control over share clearing would make it difficult for rival exchanges to compete with the LSE.
Johnson says achieving the "right result" before the Competition Commission was one of her greatest career achievements.
"What we said was reflected in the final decision by the Competition Commission, and from our point of view that was a very successful outcome," she says. "We felt that clearing should be kept separate from the exchange because that's how you maximise competition. The commission agreed."
The bidders fight back
But Johnson and her legal team did not have long to celebrate the victory before they were back on the defensive. Almost simultaneously with the commission's judgment, Nasdaq, represented by Skadden Arps Slate Meagher & Flom, announced a £2.4bn informal cash bid for the LSE.
Working closely with longstanding external adviser Freshfields Bruckhaus Deringer corporate partner Graham Nicholson, Johnson stood her ground on behalf of the LSE, rejecting the bid immediately, which she says "substantially undervalued the company".
But the rejection statement was not nearly as harsh on Nasdaq as the LSE was on Macquarie Bank, which walked away from its £1.5bn hostile bid in February, with lead legal adviser Helen Bradley from Baker & McKenzie conceding defeat.
In December 2005, the LSE embarrassed the Australian lender after the exchange rejected Macquarie's 580p-a-share offer as "wholly inadequate".
Macquarie's bid sparked an outcry by leading members of the LSE, who called on Chancellor Gordon Brown to intervene, complaining that such a deal would hand the near-monopoly enjoyed by the LSE to a private company funded by huge debts.
A mud-slinging match ensued, with Macquarie accusing the exchange of "poor cost control" and "expansion failures" within its formal offer document.
At the coalface of the dispute, Johnson remained unfazed by Macquarie's tactics and insists her approach to the matter was totally pragmatic. "It was a standard hostile defence," she says. "We drew up a couple of defence documents and our defence was quite positive. We stated clearly that Macquarie had undervalued the company and demonstrated what our value was. Obviously we've done that effectively, because look at our share price now."
The price is right
Indeed, the skyrocketing share price has been the biggest barrier to would-be bidders. One corporate lawyer who has had some recent dealings with the LSE tells The Lawyer: "I don't think the LSE legal team has had to be all that innovative to reject the bids so far - it's all been about the price tag. It's a case of what you see is what you get. The LSE has said it's willing to come to the table for the right price, and so I think if it does go it will go to the highest bidder."
As one magic circle partner insists, the bidding war has had such an impact on share prices that the majority of would-be bidders have missed the boat. "The timing of the bids have been bad," he says. "Even Macquarie's bid was a long way over and above what share prices were before Euronext got involved. Really, this all should have happened two years ago."
Another high-profile corporate lawyer says the LSE's defence tactics were "hypocritical" given the free-market regime it profits from. "The LSE has been very quick to reject these bids, particularly the Nasdaq bid, which it seemed to reject immediately before really looking at it," said the lawyer. "It benefits from and encourages a free market, unless it applies to itself."
Big Apple bites back
With Macquarie and Nasdaq so far fended off by the LSE, the New York Stock Exchange (NYSE) might be the next to weigh in. The NYSE, represented by Manhattan firm Wachtell Lipton Rosen & Katz, recently began trading as a public company, opening the door for a possible bid for the LSE.
While some industry commentators insist that the LSE has its sights firmly set on a tie-up with Euronext, the majority have their money on the Americans taking the trophy. "They have the deepest pockets and, if they're willing to pay the price, the LSE will come to the table," says one City partner who has been involved in some of the negotiations with the LSE. "This has become more about preventing another party from having it than it is about actually wanting the LSE as a company."
The business of law
In her position at the LSE, it is no wonder Johnson likes to consider herself as much a businessperson as a lawyer.
Johnson cannot speak about the LSE management's immediate plans for the stock exchange, but there is no doubt that she will be the driving force behind its future moves.
"Part of my role includes getting involved in a lot of strategic discussions - everything from what we want to achieve to how we go about it and where we should go next," she says.
While many in-house lawyers strive to have a say in business direction, Johnson has already achieved that status within the LSE. Just recently she enjoyed a proud moment when an executive said Johnson "sounded like a businessperson" as opposed to a lawyer.
"It demonstrated that I'd crossed that barrier from being a lawyer to delivering the information in a way that made business sense," says Johnson.
Not bad considering that Johnson, a former Herbert Smith corporate partner, left private practice 10 years ago with every intention of leaving the law behind.
Johnson left Herbert Smith to join the LSE's regulatory department. While using her knowledge of the law as part of her job, Johnson did not make her comeback as a lawyer until five years later, when she was appointed as the LSE's head of legal.
"I moved into market regulation," she says. "I thought it would be quite interesting to work in a different environment to private practice. But then I became head of the legal department and I realised what I was missing."
Johnson has her favourite external legal advisers, including Herbert Smith's competition head Jonathan Scott, who she lists as her main mentor.
Scott says it is a longstanding relationship based on mutual respect. "She's tough, very bright and commercially aware," he says. "What I admire most about her is that, when it's necessary, she's prepared to stand up to management and give them the advice that they don't want to hear because it's the right advice."
While most City lawyers speak highly of Johnson and her legal team, there are those who have questioned the LSE's success and whether the soaring share price is a measure of its worth or merely a result of its trophy status.
The conclusion to this ongoing battle for the LSE still remains unclear and, like any good game plan, the victor is unlikely to show its cards until the very end. But there is certainly no doubt that the LSE's management board is planning its next move now - and that Johnson's role will undoubtedly be an integral part of that strategy's triumph or failure.