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Categorized | Equities

Deutsche Börse plan for European champion

Posted on February 26, 2016

Carsten Kengeter, Deutsche Börse chief©Reuters

Carsten Kengeter, Deutsche Börse chief

Deutsche Börse’s attempt to link up with the London Stock Exchange Group is its latest — and possibly its last — chance at creating a European champion to counter an industry upended by technological change.

The region’s two largest exchanges this week said they were working on an all-share “merger of equals” which, if successful, would correct failed attempts to combine in 2000 and 2004.

    Carsten Kengeter, Deutsche Börse’s chief executive, would take over the top role and Xavier Rolet would step back after seven years at the helm of the LSE. To assuage political sensitivity as the UK prepares to vote on whether to leave the European Union, they said a holding company would be based in London.

    On Friday the two sides stressed that a “leave” vote by the UK would jeopardise Europe’s hopes of building a unified capital market — but not the deal itself.

    “The financial infrastructure business in which the combined group operates is increasingly global… logically it should be most unlikely that “Brexit” would remove the merits of the merger,” said Peter Thorne, analyst at Edison Investment Research.

    A deal between the London and Frankfurt exchanges would be the fruition of Mr Rolet’s long-held vision that there would eventually be “three to five global exchange groups”, more comparable to investment banks.

    Both sides said a deal would be good for customers — who could save billions on the cost of trading derivatives — but also for the continent. Unlike previous merger attempts, the companies are now of a more comparable size and there is more common ground with their chief executives — both are European ex-bankers who have made London their base.

    The two heads envisage a stable institution that could provide “glue” to keep European markets united irrespective of the “Brexit” decision. “Carsten and Xavier believe wholeheartedly that this is a very good thing for the world. No matter the outcome this is good for Europe,” said a person involved in the talks.

    Combining Deutsche and LSE would create a company similar in size to US duo CME Group and Intercontinental Exchange and able to fight off rival bids.

    “It’s very clear that both companies [LSE and Deutsche] suffer a size difference versus other large companies,” said one person familiar with the discussions. If that disparity was not addressed, the person said, “reality will take over” — referring to the likelihood of a bid from the US.

    Deutsche Börse’s courtship of the LSE is a response to the 20-year revolution in technology and telecommunications.

    Cheaper, faster and more reliable equipment means traders around the world can access markets without needing to stand on an exchange floor. As fixed IT costs have soared in recent decades, most large exchanges have responded by demutualising and listing as public companies, and trying to increase trading volumes on their markets.

    More on the merger

    A visitor views a display in the main entrance of the London Stock Exchange Group Plc's (LSE) headquarters as the company holds its first ever charity trading day in London, U.K., on Monday, April. 02, 2012. U.K. stocks were little changed, as the benchmark FTSE 100 Index gained less than 0.1 percent to 5,770.94, after gaining as much as 0.6 percent and falling as much as 0.3 percent earlier. Photographer: Jason Alden/Bloomberg

    D Börse lines up LSE swoop

    News of the takeover echoes efforts in the past two decades to fashion a single mighty European entity

    Contentious timing

    The move comes at a critical junction for the City as it is beset with Brexit uncertainty

    Profile: Xavier Rolet

    The French banker has faced a range of challenges during his six years at the helm of LSE

    Profile: Carsten Kengeter

    The German banker has been quick to make his mark at Deutsche Börse, just eight months into the job

    Lex: do the deal

    This is no time for sentiment, get the merger done

    The industry consolidated rapidly, first into national institutions and then increasingly across borders into larger and larger entities. The LSE bought Borsa Italiana in 2007 while Deutsche Börse acquired Internatonional Securities Exchange of the US in 2008 for $2.9bn.

    But the shift in the industry has been double-edged. Competition from rivals and banks — enshrined in regulation — has continued to drive down market share and fees from trading in North America and European markets. Many exchanges have had to diversify into other revenue sources, like technology, clearing and settlement services, data and indices.

    Alex Harborne, senior risk analyst, capital markets, at consultancy Thomas Murray, likened the industry to airlines. “With fixed costs and volumes falling, they have to consolidate to maintain their economies of scale. We’ll need to see what the cost saving plans are [for the Deutsche Borse-LSE deal] before deciding whether it’s realistic.”

    A deal would unlikely disturb current business too much. The two sides rarely compete in the same products.

    “Measured against what many exchanges thought they might achieve in 2000, the current position is a little lacklustre — none of them fought and won the right to be called a pan-European stock exchange,” said Richard Balarkas, the former chief executive of brokerage Instinet Europe. “That was left to the new entrants. None has managed to drag foreign exchange, commodities or bonds on to democratised electronic exchange models.”

    Crucial details remain outstanding pending the formal offer — expected within weeks. How Deutsche Börse and LSE plan to merge their clearing houses, the subsidiaries that risk manage derivatives trades, will be critical. That issue is likely to be closely assessed by European regulators to determine whether it will create a regional monopoly and disadvantage users.

    Deutsche Börse’s last attempt at a major deal, in 2012 with NYSE Euronext, was blocked by European antitrust authorities, with the company at the time labelling the decision “a black day for Europe”. Avoiding another rejection may take all of Mr Rolet and Mr Kengeter’s diplomatic skills as they seek to satisfy shareholders, employees, customers and regulators.