LSE-Deutsche Boerse Merger: Is the Third Time the Charm for the Potential European Trading Powerhouse?

Deutsche Boerse AG announced in mid-March it plans to acquire the London Stock Exchange (LSE) in a U.S. $30.6 billion deal that will form the world’s second-biggest trading platform.

The merger unites the City of London, a leading global financial centre, and Frankfurt, the home of the European Central Bank and the hub of continental Europe’s largest economy, Germany. Deutsche Boerse and LSE will be subsidiaries of the combined company, uniting LSE’s share trading operations with Deutsche Boerse’s derivatives dealing business.

The new holding company, UK TopCo, will pay tax in the United Kingdom, but it will be listed in London and Frankfurt.

“We are creating an industry-defining combination,” LSE Group Chief Xavier Rolet said in a conference call Wednesday, March 16. “It’s the right deal for the shareholders, customers and employees of both LSE Group and Deutsche Boerse. It is absolutely the right time to take this transformational step in our histories.”

Under the terms of the deal, Deutsche Boerse shareholders will hold 54.4 percent of the new holding company’s capital, while LSE equity holders will own 45.6 percent.

Deutsche Boerse chief executive officer Carsten Kengeter will run the new firm’s day-to-day operations, while LSE chairman Donald Brydon will become chairman of UK TopCo.

“[The merger] is the logical evolution for our companies in a fundamentally changing industry,” Kengeter said in a statement released by the LSE Wednesday, March 16. “…It brings together two of the most respected and successful market infrastructure providers in the world to lead the way in European capital markets and set the benchmark for further growth.”


A Merger of Equals

Financial services experts say this “merger of equals” is part of a bigger trend, as the exchange industry has been in the midst of consolidation since the beginning of the 21^st century. Stock exchanges have been competing with one another during the past 15-plus years, and are now repositioning themselves to meet the challenges of client demands, globalization, regulation and technology.

“Exchanges are pursuing mergers due to the inherent economies of scale, declining equity market volume, and competition from dark pools and off-exchange transactions,” Steven Schoenfeld, founder and CIO of New York-based BlueStar Global Investors, told CAIFU Monday, March 14.

Cross-border merger proposals since 2000 have been numerous, but many have been unsuccessful. In fact, this is Deutsche Boerse’s third attempt to buy or merge with the LSE following two failed attempts in 2000 and 2004 because of antitrust scrutiny from Brussels, the headquarters of the European Union.

“All exchanges are trying to be number one,” Guy Erb, managing director of the Berkeley Research Group in New York, told CAIFU Friday, March 11. “They buy market share, and sell parts of [its assets] to get better.”

Global investors are moving away from the term “stock market” – a place where stocks are traded, Erb explained, and are now referring to the LSE, the New York Stock Exchange, and the Toronto Stock Exchange as simply “exchanges” – a marketplace where securities, commodities, derivatives and other financial instruments are traded.

If the merger between the LSE and Deutsche Boerse gets the green light from regulators, it will be a significant consolidation in the industry, Schoenfeld stated. “The combined exchange will be a powerhouse for both equities and derivatives trading, rivaling both ICE [Intercontinental Exchange] and CME [Chicago Mercantile Exchange] in global scope.”

Those two U.S. rivals may also embark on a takeover war for the LSE. ICE officials said in early March the Atlanta-based company – owners of NYSE, among several other stocks and securities markets worldwide – might make a counteroffer.  BloombergBusiness reported in early March that CME, the world’s largest trading platform by market value, might also step in with an unsolicited bid.

Schoenfeld said he believes both ICE and CME will make offers, either for the LSE, or for components of the exchange. “Also, the index business of the LSE – FTSERussell – would be quite attractive to both ICE and CME, who lag other exchanges in this area,” he added.

Erb agreed. “The LSE is an attractive property for both the ICE and CME. ICE is a large clearing operation with advanced technology.” To combine clearing operations is a big selling point, he pointed out, as that drives intense competition, reduces the cost of players, and gives more volume to shareholders.

The LSE-Deutsche Boerse deal is once again subject to antitrust clearances and other required regulatory consent. It is expected to be completed either by the end of this year or the first quarter of 2017.





Deeper Consolidation in Asia

As the United States and Europe continue courting one another by forming mega exchanges, Asian exchanges may be feeling the pressure to jump into the fray.

Until China’s economic slowdown in 2015, North American and European exchanges were gazing toward Asia’s exchanges, wanting to tap into the region’s growth. To date, financial services analysts say Asian exchanges are more likely to buy Western partners rather than the other way around, Reuters reported in March.

If the LSE-Deutsche Boerse merger goes ahead, it will increase pressure for consolidation within Asia, especially in Southeast Asia, where exchanges like Singapore, Thailand, Indonesia and Malaysia could benefit from the scale of a larger partner, Schoenfeld said. For example, Japan’s main exchange already holds a strategic stake in the Singapore Exchange.

“Also, as part of the merger, the combined entity could sell some assets,” he continued. “The Hong Kong Exchange – which already owns the London Metals Exchange since 2012 – could be a natural buyer for any divestments of LSE assets.”

Erb echoed Schoenfeld’s sentiment. Strategic asset sales may be the way to go, not only in Asia – but also around the world. “Deutsche Boerse sold its assets to Nasdaq, while Nasdaq sold its assets to Nordic OMX,” he explained. “Exchanges need to concentrate on what they do best – in the case of Deutsche Boerse, they offer a complete portfolio of services, market data, indices, strong technology and derivatives.”

Erb acknowledged the only option in the short run for Asian markets is cooperation across markets and regions, including ASEAN, as well as with the Hong Kong, Shanghai and Shenzhen exchanges – even though the latter two are non-profit organizations. “Attempts to consolidate across regions will continue,” he said.

“This prospective deal is only one part of a larger trend, and won’t be the last one,” Schonefeld concluded. “Small independent exchanges around the world will soon have to choose partners, or be left out of the 'dance.’”

 

A Decade of Cross-Border Exchange Mergers

Consolidation has dominated the exchange landscape in the past 10 years.

While the global economic crisis in the years after 2008 slowed down activity, exchange merger mania bounced back in 2012, but regulators and shareholders have challenged the process since then.

Here’s a look at the recent history of merger activity among global exchanges:

• May 2006: NYSE and Euronext merged in a $14 billion deal, creating a transatlantic exchange.

• October 2006: Chicago’s two main derivatives exchanges, the Chicago Mercantile Exchange (CME) and the smaller Chicago Board of Trade, merged to create the world’s largest futures exchange.

• May 2007: Nasdaq acquired Nordic markets and technology group OMX for $3.7 billion in cash and shares.

• December 2007: TSX, the parent of the Toronto Stock Exchange, bought the Montreal Exchange for C$1.3 billion, creating the TMX Group.

• January 2008: NYSE Euronext paid $260 million to acquire rival American Stock Exchange, boosting its presence in U.S. derivatives and exchange-traded funds.

• June 2012: Hong Kong Exchanges and Clearing won the battle to buy the London Metal Exchange for $2.1 billion. The deal catapulted HKEx into the global league of exchanges.

• December 2012: ICE agreed to buy NYSE Euronext in a cash and shares deal worth $8.2 billion.

Source: Financial Times