Offer by OM Group-Pt.2

London Stock Exchange 29 August 2000 OM GROUP -------- OFFER FOR LONDON STOCK EXCHANGE PLC ----------------------------------- PART 2 OF 5 1. OM announces the terms of an Offer for LSE --------------------------------------------- The aim of OM's Offer is to secure LSE's position as the leading European exchange for investors and intermediaries world-wide by offering integrated and cost-efficient solutions. By bringing together two complementary companies, LSE with its liquid market and recognised brand, and OM with its cutting-edge technology and commercial drive, the Offer will provide LSE with key elements needed for growth. OM strongly believes that its Offer for LSE will benefit both LSE customers and LSE Shareholders. OM met LSE's management and advisors last week with a view to securing the recommendation of the Board of LSE for its proposal. Although this initial approach was rejected by LSE, OM urges the Board to consider the commercial and technological advantages of a combination with OM. 2. Information on OM -------------------- OM is an international technology company with a market capitalisation of approximately GBP2.6 billion that develops and provides transaction technology to customers world-wide. It owns and operates a number of exchanges and clearing houses. Over the last 15 years, OM has become the partner of choice and a world leading provider of integrated exchange technology to 20 international exchanges and clearing houses. OM also develops and provides technology solutions to leading banks and brokers in more than 20 countries. OM has a strong track record of creating shareholder value, growing its market capitalisation from approximately GBP230 million at the end of 1995 to approximately GBP2.6 billion today and gross profits by an average of over 30 per cent. per annum over the last four years. OM founded and operated the first for-profit, privately owned electronic derivatives exchange in 1985, which was publicly listed in 1987 and then successfully integrated with the Stockholm Stock Exchange, which it acquired in 1998. OM has since 1989 owned and operated OM London Exchange, one of six Recognised Investment Exchanges ('RIEs') in the United Kingdom. 3. Summary of the Offer terms ----------------------------- Under the Offer, OM will offer LSE Shareholders 0.65 new OM Shares and GBP7.00 in cash for each share held. On the basis of OM's closing share price of SEK425 on 28 August 2000, the latest practicable date prior to this announcement, and an exchange rate of SEK13.68:GBP1 as published in the Financial Times on that date, this values each LSE Share at GBP27.19 and values LSE at approximately GBP808 million. The Offer fully recognises the value of LSE and its potential, and OM believes it is superior to that of the iX merger for LSE Shareholders. The Offer will be for all LSE Shares issued and to be issued and will be made by Lazard on behalf of OM. A Loan Note Alternative will be available to LSE Shareholders to give them the flexibility to defer capital gains tax liability on the cash element of their consideration (where eligible). Full acceptance of the Offer would result in LSE Shareholders owning 18.5 per cent. of the New Group on a fully diluted basis. The value of the Offer represents a premium of 15.7 per cent. to the closing price of a LSE Share on 25 August 2000, being the closing price prior to LSE's announcement of OM's approach. OM confirms that it has arranged committed facilities in respect of the cash element of the consideration under the Offer. The issue of the new OM Shares is subject to approval by OM Shareholders. OM's Board has unanimously voted in favour of the Offer. The Board includes members who either themselves hold, or represent shareholders who hold, 40 per cent. in aggregate of OM's issued share capital. OM expects that the transaction will be earnings enhancing (before amortisation of goodwill) in the first full year following completion of the Offer. This should not be construed as a profit forecast or be interpreted to mean that the future earnings per share of OM will necessarily match or exceed the earnings per share for completed financial periods. OM intends to seek a secondary listing on the London Stock Exchange following the completion of the Offer. Further information regarding the Offer, including the conditions and certain further terms, is set out in the Appendices to this announcement. 4. Cost and revenue synergies ----------------------------- OM believes that the New Group could achieve yearly pre-tax cost savings rising to more than GBP30 million within four years. This estimate is based only on publicly available information and limited information provided by LSE. Further information has been requested from LSE that, if received, may underpin an upward revision of this estimate. The aggregate cash cost of achieving these synergies is expected to be approximately GBP58 million. OM will create a restructuring provision upon acquisition and this amount will therefore be included in the goodwill arising from the transaction. More importantly, OM believes there will be significant potential for enhancement of income from trading service-related activities. Appendix VI sets out the Directors' statement of estimated cost savings (including the bases and assumptions on which it is made) and supporting letters from Ernst & Young and Lazard. 5. Background to the Offer -------------------------- The Board of Directors of OM believes that the success of stock exchanges in the future will be determined by their operational efficiency, brand strength, technological superiority and their ability to provide systems dependability at the lowest trading costs for customers. The Directors also believe that investors are looking across European borders for transparent and liquid markets on which to trade their shares, at the lowest possible costs. Furthermore, the Directors consider that through deregulation in European financial markets, technology-based alternatives will become an important feature in the competitive landscape and will place increased pressure on the traditional securities exchanges to increase efficiency. Accordingly, the Board of Directors of OM feels that strengthening the technological and commercial base of LSE markets and trading platforms will give LSE a competitive advantage that will put it in the best possible position, ahead of traditional national exchanges, to exploit global equity market opportunities. OM strongly believes that its Offer for LSE will benefit both LSE Shareholders and LSE customers by: * offering full value to LSE Shareholders * securing LSE's position as the pre-eminent European secondary market for trading in both high growth and blue chip companies within a single market framework * reinforcing the retail market by making equity trading more accessible * strengthening LSE as the preferred market for initial public offerings in Europe * providing LSE with OM's state-of-the-art transaction technology, to equip LSE with sufficient transaction capacity to meet comfortably the expected substantial growth in transaction volumes * targeting vertical efficiency between exchange, clearing and settlement functions * providing clarity and simplicity by avoiding regulatory compromise: the FSA will remain the sole regulatory authority for LSE * capitalising on LSE as an authoritative source of market information and developing new and profitable value-added information services * adding further sources of revenue from developing e-commerce businesses The New Group will have the financial resources to exploit OM's capabilities to transform LSE into a fully commercial organisation that will deliver value to both its customers and its shareholders 6. Secure LSE's position as the pre-eminent European secondary market --------------------------------------------------------------------- OM intends, through its Offer for LSE, to reposition LSE as the pre-eminent European secondary market for trading in both high growth and blue chip companies within a single market framework. The New Group aims to develop LSE as the most cost-efficient, dynamic and competitive market place for European securities distributed through an extended network. A number of initiatives will be pursued to achieve this: * Develop a pan-European electronic equity market for blue chip -------------------------------------------------------------- companies --------- OM intends to develop a new pan-European electronic equity market for trading in blue chip companies based on an order-driven market model. OM intends to build on LSE's current market presence and, through technological development, provide the market with efficient, low cost pan-European trading with integrated clearing and settlement. * Reinforce the retail market --------------------------- With better access to the retail market through extensive co- operation between LSE and Jiway, overall volumes are expected to increase. OM has long experience in developing the retail product offering in both equities and derivatives through providing, for example, analytical tools, education packages and user-friendly internet facilities. Jiway is an integrated cross-border retail trading platform for retail brokers. It was developed jointly by OM and Morgan Stanley Dean and is scheduled to commence operations in November 2000. * Integration of cash equities and equity derivatives --------------------------------------------------- It is OM's belief that LSE should be in a position to offer seamless exchange trading for both equity and equity derivatives. This would increase overall volumes and provide economies of scale for the exchange. As a further step, offering a single platform would provide cost savings for both the member and the exchange in both administrative and technology development functions. Furthermore, compiling all market data and trading into one system provides for more opportunities for customers to exploit arbitrage possibilities and enhances the distribution potential of products such as warrants and other equity derivatives. The equity warrant markets in Europe are growing rapidly but the Directors of OM believe that the warrant market in the United Kingdom is under-developed in comparison. OM intends to use its experience in growing the warrant market in Sweden at 75 per cent. per annum over the last two years in order to develop an active equity warrant market on the London Stock Exchange. OM has extensive experience in operating integrated cash and derivatives exchanges and achieving operational scale, and is currently moving toward a common platform on its in-house exchanges. After implementation of the Offer, OM would like to explore opportunities to co-operate with London International Financial Futures and Options Exchange plc ('LIFFE') as a partner in developing this concept. * Expand LSE's trading network in Europe -------------------------------------- OM intends to increase the European distribution capacity of LSE by establishing low cost technical access points, or hubs, in key strategic locations across Europe. This would broaden the potential membership base significantly and attract new European members, but would avoid them having to bear the cost of establishing direct links with LSE. An increased membership base should provide more liquidity in the market and tighter pricing, to the benefit of both users and investors. OM has already successfully implemented this concept with both OM Stockholm Exchange and OM London Exchange, with hubs in five major European cities, providing international users, investors and listed companies with easier access to OM's markets. The New Group will seek to broaden the range of tradable securities available to LSE members. This may be effected by an extension of LSE's network through co-operation with other exchanges. OM has extensive experience from bringing together Scandinavian exchanges on the NOREX platform. The New Group will, in the medium term, seek to integrate the trading of cash securities and derivative contracts of the OM Stockholm Exchange into LSE, pooling liquidity, investor access and order books of both exchanges. * Evolution of market models -------------------------- The Directors of OM believe that the shares of companies at different stages of development, from newly floated start-ups to blue chip companies, are better suited to being traded on markets based on different market models. OM intends that LSE's range of market models, which cater for the variations in liquidity seen across its stocks, will continue to form the foundation of its markets following completion of the Offer. The New Group would aim to develop these models where improvements to liquidity can be achieved or where it is a necessary step in the creation of a truly pan-European market. 7. Strengthening LSE as the preferred European IPO market --------------------------------------------------------- In securing LSE's position as the pre-eminent European secondary market, OM believes LSE's attractiveness to companies pursuing initial public offerings will be enhanced. The New Group will capitalise on LSE's existing strengths and on OM's marketing expertise and its competence as a technology company to promote LSE in this light. The New Group will embark on a marketing campaign to present LSE as the European market delivering the best visibility and value proposition to companies seeking an initial public offering. In particular, OM will work to improve AIM's appeal to start-up and high growth companies. Where necessary, the New Group would install technology systems that are specifically targeted at initial public offering processes, for example systems that facilitate book building exercises or that raise the visibility of initial public offerings distributed via the Internet. In seeking to enhance the attractiveness of LSE to primary issuers, OM will take advantage of LSE's market recognition and its respected regulatory regime. It will also both draw upon and yield benefits to London's concentration of venture capital funds, asset managers, IPO investors, equity analysts and investment banks. The New Group also intends to work towards enhancing the competitiveness of the listing rules governing the high growth segment of the market as part of its effort to attract an increased volume of initial public offerings. 8. Improvements in technology and trading platform -------------------------------------------------- OM is a leading supplier of exchange trading, clearing and settlement technology to 20 international exchanges and clearing houses, and provides technical facilities management services to 10 of them on a day to day basis. OM has a track record of high growth in selling its products and services competitively. In building this track record, OM has offered and continues to offer world leading functionality, capacity and performance. This commercial focus ensures that OM's own exchanges and its customer base constantly have access to leading edge technology that enables sustained competitive advantage and ongoing market innovation. OM continually renews its technology platforms. The latest generation of exchange trading technology went into use in 1999. OM's transaction technology strengths ------------------------------------- It is anticipated that as part of the New Group, LSE can be transformed into the most technologically advanced European exchange by exploiting OM's transaction technology strengths. In particular: * OM will ensure that LSE is equipped with sufficient transaction capacity to meet comfortably the expected substantial growth in transaction volumes. OM's platforms offer client exchanges amongst the greatest capacity and scalability available. OM has delivered systems with capacity in excess of 5,000 order transactions per second and 20,000 price changes per second. * LSE's exchange operations would be run as part of the New Group's global service business. OM currently runs a global exchange operation with data centres in London, New York and Stockholm, and has a presence in 19 locations world-wide. It provides 24 hour support for 365 days a year, and makes service level commitments to exchanges covering system capacity and performance as well as support response times. * significant development synergies will be generated through OM's extensive experience and track record in delivering a wide range of market types and instruments on a single exchange platform. After the successful completion of the Offer, LSE would benefit from the breadth of functionality provided by OM's single platform approach. For example, the demands of energy markets for 24 hour trading have delivered functionality that is now available to the securities trading industry. OM's platform is designed to serve multiple exchanges with different needs. The platform can handle quotation, order book and call auction models for both cash and derivatives on equities, fixed income, currency and commodities. It supports a broad range of trading patterns from order-driven to quote-driven and hybrid markets, and it supports market-makers and traders with varying levels of transparency. LSE will benefit from this flexibility by being able to respond rapidly to changes in trading patterns, market models and financial products. Proven world-wide track record in systems migration --------------------------------------------------- OM has significant experience and a solid track record in implementing technology migration for existing market places. In 1999, the OM Stockholm Exchange was successfully migrated from its Tandem environment to OM's leading edge, UNIX-based solution. Member impact was kept to a minimum by providing a backward compatible interface. This move enabled the exchange to increase its capacity in a cost-efficient way and to move forward more rapidly in launching new functionality and member services. OM has similarly used its technology and market experience to transform other market places, including the American Stock Exchange, the International Securities Exchange (ISE) in New York, the Australian Stock Exchange and Hong Kong Exchanges & Clearing. Seamless migration for LSE with minimum disruption and cost to LSE members -------------------------------------------------------------------------- It is OM's intention that migration of LSE to a new platform will be executed with minimum disruption and cost to LSE members. The following programme of technology transformation will be implemented as soon as practicable after the implementation of the Offer: * OM will deploy its leading edge technology into LSE's markets to allow delivery of cost synergies and reductions in on-going operational and support costs, and to enable LSE to develop its markets at a more rapid pace. As OM's exchange systems can be adapted easily to support the full range of current LSE market models (SETS, SEAQ, SEAQ Auctions and SEATS PLUS), the technology migration will not necessitate changes to trading patterns * OM will ensure that any member impact in deploying the new technology is minimised. In particular, it will provide access to Trading and to London Market Information Link ('LMIL') services through backward compatible Broadcast, Interactive Request and Secure Interactive interfaces * OM will introduce improved Internet and wireless access to support Extended Mark-up Language (XML)-based Trading and LMIL services for members and their customers. In doing so, it will enhance the visibility and reach of LSE markets and assist its members in building up their retail client base * OM will actively support independent software vendors in providing trading tools for LSE markets. OM currently supports third-party vendors on its own and its customers' exchanges, and fully realises the value that they bring to members 9. Clearing and settlement -------------------------- OM is committed to vertical efficiency of exchange, clearing and settlement activities, so as to bring significant cost savings, reduced complexity and a seamless process from trading to settlement. OM will use its experience as a provider of technology for the entire transaction chain and an operator of clearing house systems and services for settlement and back office functions, as well as the experience derived from its involvement in Sweden's national central securities depository (the VPC), to create maximum vertical efficiency for LSE, particularly in the area of cross border clearing and settlement, which is currently characterised by costly and disparate systems. In OM's opinion, achieving this vertical efficiency is the most important step towards reducing overall transaction costs for the end-user. The end-user would benefit from full clearing, central counterparty and netting facilities and therefore from lower capital requirements. After implementation of the Offer, the New Group would seek to develop co- operation with CRESTCo and LCH and would like to initiate discussions with these parties as soon as practicable. Clearing -------- OM has long-standing experience as an operator of derivatives clearing houses. It currently operates clearing houses in Stockholm and London and supplies clearing services for other markets and clearing technology to, amongst others, the Chicago Board of Trade Clearing Corporation, the world's largest independent clearing house. If the planned pan-European options and equity index futures market can be achieved through an alliance with LIFFE, the New Group would seek stronger collaboration with LCH to provide an efficient vertical integration between LSE's trading system and LCH's clearing systems. In the event that such collaboration is not possible, OM intends to use its extensive capability as both an operator of clearing houses and supplier of clearing systems to provide a clearing house for the derivatives market that would be offered by LSE. The New Group intends actively to support the cash equities clearing service currently being developed by CRESTCo and LCH. OM believes that its expertise in operating clearing houses and services will help contribute to the timely introduction of these services and their continued development. The New Group intends to seek to ensure that the clearing service for equities and the derivatives clearing house are integrated so that members are able to obtain margin offsets between their cash equity and derivatives positions. Settlement ---------- The New Group will aim to take advantage of CRESTCo's current extensive development programme, which plans to provide settlement of a broad range of European equities through its system. When completed, CRESTCo will be able to connect to the major European national and international central securities depositories (CSDs) so that non-UK stocks can be settled in a significantly simpler and more efficient manner than at present. The New Group intends actively to encourage and promote these developments so as to bring about a consistent, low cost settlement service for LSE members as soon as practicable. Using its experience in providing transaction processing integration technology, the New Group will also seek ways to increase the efficiency of interfaces between LSE's trading and CRESTCo's settlement systems so as to reduce members' data input costs. It will seek to ensure that a single, efficient, cost-effective settlement mechanism serves all of LSE's cash and derivatives markets and will aim to achieve straight through processing of trades. In collaborating with CRESTCo, the New Group would aim to: * simplify settlement of all European cash securities for LSE members * provide members with an interface to a single settlement process for European cash equities * reduce the cost and complexity of interfacing to LSE's trading and trade reporting systems * build on the investments in infrastructure already made by CRESTCo and LSE members * promote and encourage CRESTCo's initiatives in increasing the number of CSD partnerships world-wide 10. Regulatory simplicity and continuity ---------------------------------------- The operations of LSE will not initially change materially as a result of completion of the Offer and therefore issues relating to market integrity, structure and surveillance should not arise. The Financial Services Authority ('FSA') will continue to be solely responsible for all the activities of LSE under OM's ownership. This will avoid added costs to market participants in understanding and complying with unfamiliar, new regulation. The London Stock Exchange will continue to be a RIE supervised by FSA and will continue to make and enforce rules for companies admitted to trading on its markets pursuant to the requirements of the Financial Services Act. The implementation of some of the other, longer term plans set out in this announcement may require regulatory consent, which will be sought as and when appropriate. As the process of European consolidation of exchanges continues, the New Group will fully support the harmonisation of listing rules across the EU and internationally to the benefit of current LSE users and other market participants. 11. Enhanced company and information services --------------------------------------------- The LSE is an authoritative source of market information and its information services are an important source of revenue. The New Group will seek to develop the existing product offering as well as new and profitable value- added information services. In particular, OM believes that services providing communication between the exchange and its users, companies admitted to trading and investors can be improved by, for example, using the Internet to distribute market prices, written reference material, market modelling systems, clearing reports, software updates and as a medium for e-learning and market user feedback. The New Group also intends to develop Extranet-based information services for listed companies that are tailored, user-definable and on a real-time basis. 12. E-Commerce opportunities ---------------------------- E-commerce markets are migrating their technology from first generation servers with lightweight functionality to next generation solutions that provide high security, high availability and the ability to handle large transaction volumes around-the-clock. E-commerce market places are turning to technology developed for, tested and proven in financial market places to find such solutions. Solutions applicable to a broad spectrum of e-commerce processes ---------------------------------------------------------------- The solutions OM has available can be applied to a broad spectrum of e- commerce processes, and are not limited to traditional market place functionality. OM is involved in a number of e-commerce initiatives that are enabled by its technology: * OM has introduced a number of new market solutions, Jiway being the clearest illustration. Jiway is an example of OM's strategy of utilising its combined exchange and technology expertise in the creation of new market solutions. Jiway hopes to establish an on- line community that will provide its members, being retail brokers, with cost-efficient liquidity through which they can serve European retail investors in the e-commerce era. Another example is the launch of the UK Power Exchange (a market for UK electricity) * OM provides fully automated solutions for the members of e-commerce communities. On-line broker firms such as National Discount Brokers and E*TRADE use OM's Orc and OneWorld ranges of products to support the efficient and swift flow of information all the way from order entry to execution and settlement OM believes that the e-commerce market place will evolve further. E-commerce participants will increasingly value not only 'industrial strength' technology solutions, which OM can provide, but also the neutrality of an independent market operator. As the e-commerce market matures further, this will present LSE with opportunities to launch new ventures in novel market sectors enabled by OM's technology. 13. Corporate governance ------------------------ New Group --------- OM considers it in the best interests of the enlarged shareholder, business and customer base of the New Group that OM's Board of Directors be widened after implementation of the Offer so as properly to reflect LSE's substantial contribution to it. In seeking to achieve this, it is intended to propose the appointment to the OM Board of additional Directors: * who best represent the interests of participants in the City of London's financial markets, both large and small * to internationalise the Board's membership to give it the broadest possible access to experience and new thinking on market developments The Board of Directors of the New Group will continue to operate under stringent corporate governance standards and will hold regular meetings in London. LSE --- Following completion of the Offer, LSE will be a wholly owned subsidiary of OM. If appropriate, OM will appoint a number of non-executive Directors to the Board of LSE, to be drawn from individuals of appropriate standing. The management of LSE is likely to comprise members of both OM's and LSE's present management teams, supplemented, where appropriate, by external recruitment. OM will support strong management incentives in line with international practice. OM attaches great importance to the skills and experience of the existing management and employees of LSE and believes that the Offer will give rise to exciting new opportunities for them. OM confirms that, following implementation of the Offer, the employment rights of all LSE's employees, including existing pension rights, will be fully safeguarded. The LSE will continue to be headquartered in London. OM foresees that OM's existing exchange operations in London will in due course, as appropriate and subject to relevant regulatory requirements, be merged with LSE and consolidated into a single RIE under LSE's management. The New Group will institute and promote regular consultation by LSE with customers and end-users, drawing on senior practitioners with a broad perspective on market structures. In addition, working groups of practitioners and other interested parties including issuers will be formed to cover specific aspects of market structure development, such as primary markets and admission to trading, secondary market trading structures, technology including online systems, and migration issues. Retail participation is seen as a key growth area and the New Group wishes to promote the involvement in such working groups of representatives of the private client and retail communities. FURTHER DETAILS OF THE OFFER ---------------------------- Appendix I contains the terms of the Offer Appendix II contains the conditions to and certain further terms of the Offer Appendix III summarises the terms of the Loan Notes Appendix IV describes the financial effects of acceptance of the Offer Appendix V provides further information on the bases and sources for certain information contained in this announcement Appendix VI sets out the statement of estimated cost savings (including the bases and assumptions on which it is made), together with supporting letters from Ernst & Young and Lazard Appendix VII contains a list of definitions used in this announcement ENQUIRIES --------- OM GROUP Olof Stenhammar, Chairman On 29 August 2000: +44 (0)7979 703282 Thereafter: +46 (0)8 405 6641 Per E. Larsson, President & On 29 August 2000: +44 (0)7785 701231 Chief Executive Officer Thereafter: +46 (0)8 405 6609 Magnus Karlsson Bocker, On 29 August 2000: +44 (0)7979 703282 Executive Vice President Thereafter: +46 (0)8 405 6641 Jakob Hakanson, Investor Relations +46 (0)8 405 6042 Anna Eriksson, Corporate Communications +46 (0)8 405 6612 LAZARD +44 (0)20 7588 2721 David Verey Jonathan Dawson Svante Adde +46 (0)8 442 5400 HILL & KNOWLTON Anthony Payne +44 (0)20 7973 4489 +44 (0)7785 701231 Lazard, which is regulated in the UK by The Securities and Futures Authority Limited, is acting for OM and no-one else in connection with the Offer and will not be responsible to anyone other than OM for providing the protections afforded to customers of Lazard or for giving advice in relation to the Offer. No offer or invitation to acquire or exchange securities in LSE is being made now. Any such offer or invitation will only be made in documents to be published in due course and any such exchange should be made solely on the basis of information contained in such documents. More to follow... OFFPLMFTMMATMTM

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