The London Stock Exchange (LSE) and the Deutsche Börse have announced a £20bn merger. However, this isn’t the first time a merger has been proposed between the two European leaders. In 2000, there were talks between the LSE and the Börse. However, that deal was scuppered by a takeover bid from the Swedish OM Gruppen. In the end, the LSE rejected both Börse and OM Gruppen offers. The deal resurfaced in late 2004 when the Börse made another offer to the LSE. This was rejected once again because the LSE felt “it undervalued the group”.
Now, the two giants have gotten together again to work out a deal. The Deutsche Börse CEO, Carsten Kengeter, had this to say:
“Be assured, I studied the failed talks. I examined the issues for the failures.”
There is faith within the two stock exchanges that this time the deal will work out. The aim is to create a European leader in an industry that is rapidly consolidating. By becoming a powerful player in the industry, it will allow the new entity to compete globally for IPOs and become a provider of market intelligence.
“For the most part, the two firms operate complementary businesses which provides a strong strategic rationale to the deal”
Michael Werner, Analyst at UBS
The entity will also benefit from cost savings. The merger is forecast to save 450 million euros annually for three years. It is described as a “merger of equals”. Both companies will share control of the boardroom, maintain their individual brands and operate under a holding company. According to current plans, the Deutsche Börse will own 54.4% of the merged holding company. The LSE will control 45.6%. The Board of Directors is going to be split evenly between the two exchanges, with the Chairman being a Briton.
Market response to the announcement has been positive. Both the LSE and the Börse have enjoyed increases in share prices.
However, there are challenges ahead
Firstly, due to the potential influence of the combined entity, the International Continental Exchange (ICE) – owner of the NYSE – is also considering making a bid to the LSE This would mean that the shareholders would be given the chance to consider the ICE’s offer and would require the LSE to put the deal with the Börse on hold (similar to what happened in 2000 with OM Gruppen). ICE hasn’t formally made an offer but the fact that it is considering one has already ruined the mood around the merger.
Secondly, there is the looming threat of Brexit. If Britain votes to leave the EU, then there will be a regulatory upheaval which could perhaps entail revisiting the merger deal to make necessary changes. Both organisations have said that a Brexit would mean that there would be a difference in the nature/volume of the business undertaken by the new entity. However, there is also the benefit that if Britons vote to leave the EU, then this merger would allow the London to maintain economic ties on the Continent.
Thirdly, due to the nature of the deal, the Börse will control the majority of the new entity, and the new CEO will be the current Deutsche Börse CEO. This can be a source of a problem as Britons will feel snubbed as the currentLSE CEO has greater experience running an exchange.
Moreover, there is also the fear of regulators. The combined entity will be the 3rd largest exchange in the world. This will represent a large share of the market. Antitrust regulators will work to ensure that the size and reach of the new entity does not afford it any illegal benefits (i.e. monopolistic powers) and ensure that the customers and shareholders are treated fairly. If they detect non-competitiveness, it will block the deal. This happened in 2012 between Deutsche Börse and NYSE Euronext.
Furthermore, financial stability regulators will also be concerned. The new entity will combine the German, UK and Italian (LSE owns Borsa Italiana, Italy’s leading stock exchange) markets. With such a concentration of financial activity, there is also a large concern for risk.
Lastly, it is important to ensure that one of the main reasons for the merger isn’t just for the sake of merging. With the wave of consolidation in the industry, it is possible perhaps that theLSE and the Börse are feeling the pressure. This way of thinking has led to disastrous results in the past. A prime example of this is the Wells Fargo takeover of First Interstate in 1995. Efforts to consolidate operations led to major problems, causing great customer dissatisfaction and left Wells Fargo vulnerable to takeover bids. If such a thing happens to the new entity, then any other exchange (e.g. ICE) can come in and take over at a much lower price.
To conclude, the merger seems like a good strategy to keep up with the growing consolidation in the industry, benefit from cost synergies and become a global player. However, it is important to ensure the two entities are integrated well to avoid or overcome organisational culture conflicts and also that the merger does not fall foul of the regulators, considering there will be added scrutiny due to Brexit.