The venerable Vienna Stock Exchange swallowed centuries of national pride this month to enter into talks that could lead to a merger with its upstart rival in Warsaw.
Vienna, the central capital market of the Habsburg Empire in the eighteenth century and later gateway to central and eastern Europe after the fall of the Iron Curtain, has been usurped by the Warsaw exchange , with its friendly regulation and privatisations, as the main arena for investing in the region.
Warsaw passed Vienna in terms of share of trading in central and eastern Europe (CEE) in 2008. The capitalisation of listed companies of 684 billion zlotys ($215 billion) on the main WIG20 market now dwarfs Vienna's 80 billion euros ($104 billion).
But Warsaw itself, part-owned by the government, currently faces a slowing rate of share offerings, while pension reforms could cause an exit of pension-fund assets from the stock exchange - making a merger in its interests too.
A combination could make investors take notice in an era of mega-exchanges like next-door Deutsche Boerse .
As both are secondary bourses dealing mainly in cash share trading rather than more lucrative derivatives trade, a tie-up would also enable them to cut costs and boost their margins.
"Life is becoming very tough for smaller exchanges. It's thin pickings," said Herbie Skeete, managing director of UK-based exchange consultancy Mondo Visione.
Although talks between Warsaw and the Vienna bourse's parent, the CEE Stock Exchange Group (CEESEG), are at an early stage and exploring several different forms of cooperation, analysts say only a full-blown merger would be worthwhile.
The market value of the companies listed on the two exchanges would only total some $268 billion, compared with 783 billion euros ($1.02 trillion) for Frankfurt's DAX .
Egle Fredriksson, an eastern Europe-focused portfolio manager at Sweden-based East Capital, said having a single hub for central and eastern Europe might attract more investors not specialised in the region.
The Vienna bourse, which is owned by dozens of Austrian banks, insurers and other companies, has majority or total ownership stakes in the Prague, Budapest and Ljubljana bourses.
"It would be much more interesting to have one bigger market," Fredriksson said. "The people who know less about the region would have fewer moving parts to take account of."
DEARTH OF IPOS
Vienna's structural problems include illiquid shares and negative perceptions of stock trading among investors who got burned by share price falls after the 2008 financial crisis.
Only 5 percent of Austrians own shares, including through funds, and the government may also soon lower the ratio of shares that state-subsidised private pension funds have to hold.
A looming financial transaction tax could also kill off the market makers who create liquidity in small regional exchanges.
Vienna's monthly turnover of 3.25 billion euros, down from 14.7 billion in 2007, is less than that of the London Stock Exchange in a single day. It has not seen a new listing since the 411 million-euro IPO of aluminium group AMAG in April 2011, its first since the financial crisis.
Meanwhile the Warsaw Stock Exchange hosted 17 initial public offerings last year and 33 the year before. Austrian real-estate group Immofinanz , the most liquid stock in Vienna, is planning two listings this year - a secondary listing in Warsaw and an IPO of one of its units in Frankfurt.
Austrian financiers and company bosses have been urging politicians to help reinvigorate the Vienna bourse through more privatisations and measures to encourage share ownership.
Raiffeisen , Erste Bank and Bank Austria , the three major banks in central and eastern Europe, own 31 percent of the CEESEG between them and argue the region needs a stronger regional marketplace.
Raiffeisen's Chief Executive Herbert Stepic warned in February that Austria needed to spruce up its image as a financial marketplace or risk being eclipsed by the cultural heritage sold to Vienna tourists.
"It's just not about the New Year's Concert or Sachertorte or the Lipizzaner," Stepic told a meeting of 21st Austria, an initiative of the country's top firms, central bank and the Vienna Stock Exchange to showcase Austria's opportunities.
"The message that Austria is in fact a vital investor in central and eastern Europe, together with the strength of Austria as a business location, is the message we want to send."
However, if it comes to Warsaw's taking over Vienna - in an era of consolidations on the scale of IntercontinentalExchange's $8.2 billion takeover of NYSE Euronext , anything less will barely cause a ripple - the Austrian view may change.
"The idea in itself has charm, but you have to ask yourself whether a merger would really create an institution that brings value for all the participants," said Wilhelm Rasinger, president of the Austrian Shareholder Association.
Warsaw, too, may have other ideas. Pawel Graniewski, an ex-Citigroup investment banker who was appointed to the management board of the Warsaw bourse this month, told Reuters on Tuesday his company did not need to take over Vienna.
"Warsaw is perceived not only as a capital city with a stock market but also as a financial hub for central and eastern Europe," he said in an interview in London. "We are interested in organic growth."
The Vienna Stock Exchange has declined to elaborate on its short statement confirming the talks.
Andreas Treichl, CEO of Erste Group Bank, told German investor TV channel DAF in an interview this month that Austria should get over its national pride and do what made sense.
"We should not have any nationalistic bias in this matter," he said. "I am in favour of creating a large marketplace for central and eastern Europe, and I believe that Warsaw would be a very good place."
(Additional reporting by Philip Baillie, Kylie McLellan and Tommy Wilkes in London, Alexandra Schwarz, Angelika Gruber and Michael Shields in Vienna, and Chris Borowski in Warsaw; Editing by Sophie Walker)