Deutsche Börse

Curtains on Frankfurt’s Operatic Drama

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Oh, well, gave it my best shot. Source: Reuters

The decision of the beleaguered chief executive of Deutsche Börse, the operator of the Frankfurt Stock Exchange, to step down at the end of the year brought the curtain down on a long-running drama and shifted the focus immediately to who will replace him.

After a Frankfurt court Monday rejected Carsten Kengeter’s agreement to pay €500,000 to settle charges of insider trading, his departure after months of tortuous uncertainty became more a question of when, not if. On Thursday, Mr. Kengeter threw in the towel and submitted his resignation to the company’s supervisory board.

Now it is up to board Chairman Joachim Faber to pick a successor who can restore confidence in the company after a long period of turmoil that hurt its reputation. It gives Mr. Faber a chance to get Deutsche Börse back on track and also to secure his position as board chairman after holding on to Mr. Kengeter for so long.

“That it took so long to get to this resignation has increasingly damaged the reputation of the exchange, the board, and Kengeter himself,” commented Dieter Hein, an analyst with Fairesearch. The stock exchange is entrusted with a public mission, he noted. “And you can’t explain to the public that the head of a company with such a mission behaved in a way that is possibly not above suspicion,” he said.

If the board needs an interim CEO in 2018 while it searches for a successor, it is expected to name Gregor Pottmeyer, chief financial officer, to that position, or possibly another member of the current management.

On top of everything else, it was left to Mr. Pottmeyer to report disappointing third-quarter results Thursday night. Deutsche Börse also said it would probably fall short of its profit target for the year. Even though the DAX is hitting new records, volatility – which is what drives trading activity – has remained low. Net revenue in the third quarter was up 3 percent to €576 million, and adjusted net profit up 4 percent to €198 million. The company has targeted 5 to 10 percent annual growth in net revenue and profit growth of 10 to 15 percent. While it might miss that goal this year, it held to that forecast for 2018 and 2019.

“The board is now called upon to name a credible successor as soon as possible, who puts his own imprint on the company.”

Ingo Speich, fund manager, Union Investment

The insider trading allegations dated back to Mr. Kengeter’s 2015 purchase of €4.5 million in company shares several weeks before the public announcement of its planned merger with the London Stock Exchange sent the price soaring. The merger subsequently fell through when it was blocked by the European Commission on antitrust grounds, but prosecutors opened their investigation of possible insider trading in February when they learned of the stock purchase.

Mr. Kengeter registered some early successes with a couple of smaller acquisitions and streamlining the company’s clearing units. But his resignation closes an unhappy chapter for the stock exchange operator. The former investment banker was brought on board in June 2015 precisely to seek the kind of deal he struck with LSE. That fell through, then came the prolonged brouhaha over insider trading.

Deutsche Börse has had trouble finding the right balance between expansion and becoming too dominant for regulatory authorities. An earlier deal to merge with NYSE Euronext also foundered on competition grounds. Britain’s decision to leave the European Union is expected to enhance Frankfurt’s role as the largest stock exchange in the bloc and presents new challenges for Deutsche Börse on how to capitalize on that position. This will be the task of the new chief executive.

Despite criticism of Mr. Faber for holding on to Mr. Kengeter for too long, the last thing investors want now is for him to leave and plunge the company into further uncertainty. “The board is now called upon to name a credible successor as soon as possible, who is available for a long-term commitment to the company and puts his own imprint on it,” said Ingo Speich, fund manager at Union Investment. “Faber should stay on board to shape the new strategy.”

Another big investor agreed. “Faber bears part of the blame for the whole mess, but one shouldn’t boot him out now,” he said. “We need a board capable of acting. A completely new start would presumably not be in the interests of shareholders.”

Mr. Kengeter steadfastly denied he had done anything wrong. The stock purchase was part of his compensation package and was specifically authorized by the company’s legal department. In the wake of the subsequent investigation, however, Deutsche Börse agreed to pay a fine of €10.5 million to settle.

In rejecting the settlements offered by prosecutors, the Frankfurt court cited a negative opinion by the federal financial regulatory authority, BaFin. The settlements were deemed too small for the gravity of the suspected offense. As the criminal case continued, state and federal regulators were investigating whether Mr. Kengeter was fit to stay in his job.

That question has been answered, although the judicial investigation of both Mr. Kengeter and Deutsche Börse will continue. Authorities suspect the company is guilty not only of mistakenly giving Mr. Kengeter a green light to buy the stock while secret talks with the LSE were going on, but delaying the public announcement of the merger plans for too long.

In the meantime, Mr. Faber and the rest of the board will have to find a replacement who not only knows the ins and outs of the stock exchange business, but will have the standing and managerial clout to take the Frankfurt exchange and its affiliates to the next step.

“We’re aware there are not too many suitable candidates, because a stock exchange boss needs to have a certain understanding for the political context,” said one big shareholder. “That is possibly what Kengeter lacked.” Another investor is more pointed in what qualities the new CEO must possess: “He should speak German, have a clean record and not be an investment banker.”

[Updated at 23:30 Berlin time with third quarter results]

Handelsblatt reporter Andreas Kröner covers banks and financial markets in Frankfurt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: kröner@handelsblatt.com

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