European securities exchanges may opt for closer co-operation in 2006 if a distracting and protracted battle for the London Stock Exchange does not result in a major deal.
And if a big merger continues to elude the sector, key players Euronext and Deutsche Boerse will need to clarify their strategy for growth as competition intensifies.
The long drawn-out battle to take control of the London Stock Exchange illustrates how desperate European exchanges are to merge.
Shareholders in Deutsche Boerse rebelled over its LSE bid, forcing out the management and ending its second take-over attempt since 2001. Euronext may face similar pressure if it launches a formal bid early next year.
"A (Euronext) LSE merger seems less and less likely. They really give the impression that they don't want a deal and that's maybe the reason why their (LSE's) price expectations are so incredibly high," said Alain Dupuis, an analyst at Oddo Securities.
Earlier this month the LSE rejected as "wholly inadequate" Macquarie Bank's 580-pence-a-share offer, which valued the exchange at about 1.5 billion pounds ($2.6 billion).
The LSE's shares were trading at 620p by 1032 GMT, signalling that only a much higher offer will secure the exchange.
"When you call a 580p bid derisory, it means 700p would be a minimum and a deal at this level, despite the obvious synergies, would not be that interesting for Euronext," Oddo Securities' Dupuis added.
"Either Euronext makes a symbolic offer the way Macquarie did in order to justify the money spent on legal fees, or they abandon the project, which is what I think will happen."
Euronext and Deutsche Boerse confirmed that they held merger talks but have played down talk of an imminent merger plan.
Now that the shareholders in all three major stock exchanges have their wish in the form of cash returns, the pressure will be on management to come forward with proposals to grow business.
Industry sources expect the exchanges to fall back on alliances if they cannot boost volumes through mergers or steal liquidity from rivals -- which may prove difficult, judging by the troubled experience of the US incursion by the Eurex derivative exchange.
"It seems that after all this talk about mergers and consolidation we're going back to the idea of exchanges co-operating with each other without merging," said one industry source who declined to be identified.
"It's interesting, but in the past it's never really worked," the source added.
Such failures include the European exchange alliance, which was led by London and Frankfurt, to build a single electronic trading platform for Europe's top stocks, with common rules and regulations.
"Frankly, it was a shambles," the source said.
But if larger exchanges are hamstrung by recalcitrant shareholders and heavy regulation, smaller European bourses may have greater flexibility to merge and room to manoeuvre.
The Spanish and Italian exchanges are planning to float on the market in the near future, and the Polish bourse plans to privatise so it can be sold off.
"The quiet people in all this are the Nordics. While everyone has been umming and ahhing about LSE, Deutsche Boerse and Euronext, the Nordics have increasingly got on with putting together a coherent strategy for consolidating their exchanges into one, having a common clearing and settlement organisation and now introducing a second-tier market," one industry source said.
"I think that's the area we should be looking at for competent mergers."
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