European Giant

Deutsche Börse and LSE in Merger Talks

Kengeter-AlexanderHeinlDPA
Carsten Kengeter, Deutsche Börse's chief executive, is embarking on his most ambitious merger yet.
  • Why it matters

    Why it matters

    By merging with London Stock Exchange, Deutsche Börse hopes to create a global stock exchange leader that can challenge its bigger U.S. rivals.

  • Facts

    Facts

    • The companies are valued at more than €24 billion, with Deutsche Börse’s market capitalization at more than €14 billion and LSE at about €10 billion.
    • Deutsche Börse’s shareholders would end up with 54.4 percent of the shares and LSE with 45.6 percent of shares in the combined group.
    • Deutsche Börse CEO Carsten Kengeter last week said his goal is to become number one or number two across all major divisions globally.
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Third time’s the charm? That seems to be the motto for two of Europe’s largest stock exchange operators.

Germany’s Deutsche Börse and the London Stock Exchange confirmed Tuesday that they are in merger talks in a move that would potentially create Europe’s largest trading platform.

“The boards believe that the potential merger would represent a compelling opportunity for both companies to strengthen each other in an industry-defining combination, creating a leading European-based global markets infrastructure group,” the companies said in a joint statement posted on LSE’s website.

The statement said the two were discussing a “merger of equals,” though Deutsche Börse currently has a higher market value and its shareholders would hold a nominal majority in any new holding company. The newly created firm would have a single executive board with equal numbers of Deutsche Börse and LSE managers represented.

Together, the companies are valued at more than €24 billion, or $26.4 billion, with Deutsche Börse’s market capitalization at more than €14 billion and LSE at about €10 billion.

Both sides have been here before, once in 2000 and again in 2004, while Deutsche Börse has also sought another ambitious merger in the meantime: In 2011, the German firm hoped to merge with NYSE Euronext, but the European Commission thwarted the plan, claiming it would hinder competition in Europe.

Those past failures haven’t stopped investors from hoping that this time could be different. LSE’s shares rose as much as 15 percent on news of the possible merger when it was first reported by Reuters in the early afternoon. By 4:30 p.m. in Frankfurt, Deutsche Börse’s shares were up nearly 4.5 percent to €79.75, while LSE shares climbed nearly 15 percent.

“Our goal is to lead Deutsche Börse to where it belongs…at the top globally.”

Carsten Kengeter, Deutsche Börse

Some of that optimism may be the result of faith in the new man now at the helm of Deutsche Börse. Carsten Kengeter has already been aggressively revamping the Frankfurt-based company, including its management structure, since taking over as chief executive in June 2015.

Mr. Kengeter has already bought several smaller firms since taking over the helm, including a currency trading business and two stock-indices firms worth more than €1.4 billion in total. He also brokered a cooperation deal to expand operations in China.

Just last week, Mr. Kengeter told reporters he planned to keep up the momentum this year when it comes to restructuring the firm. The company posted annual profits of nearly €2.4 billion in 2015, its best year since the 2008 financial crisis. The goal, he said, is to become number one or number two across all major divisions that the company operates in.

“Our goal is to lead Deutsche Börse to where it belongs…at the top globally,” he said in his first press conference presenting the company’s annual results. “If a company wants to move in a dynamic market, it also has to try to be more dynamic itself.”

Under the current deal being discussed, the two stock exchange operators would create a new holding company. Deutsche Börse’s shareholders would end up with 54.4 percent of the shares and LSE with 45.6 percent of shares in the combined group.

The various subsidiaries of both companies would “continue to operate under their current brand names,” according to the statement, but the merger would provide various opportunities to save costs and boost revenue by sharing platforms like OTC derivatives clearing.

 

XavierRolet-Bloomberg
London Stock Exchange CEO Xavier Rolet is expecting to broker a “merger of equals.” Source: Bloomberg

 

LSE Chief Executive Xavier Rolet has also brokered that the executive boards would be merged on equal terms. The new joint company would have “a unitary board composed of equal numbers of LSE and Deutsche Börse directors,” the statement said.

The merger has not yet been finalized, both sides stressed. The talks were “ongoing regarding the other terms and conditions of the potential merger.” There were no details yet on where the company’s headquarters would be based, or who would take the helm. Any merger would also have to be approved by regulatory authorities, which is far from certain.

Mr. Rolet and Mr. Kengeter are known to be deal-makers, however. Both also recognize that while recent volatility in global markets has helped push up the profits of stock exchange providers, the sector still remains under serious pressure.

“Our industry is like one gigantic building site,” Mr. Rollet said last November, predicting there would be more conslidation.

Rising to the very top won’t be easy. U.S. rivals like ICE – which succeeded in buying up NYSE Euronext after Deutsche Börse failed – and CME are worth twice as much as Deutsche Börse. But a merger with LSE will bring Mr. Kengeter that much closer to his goal.

 

Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin. Handelsblatt correspondents in Frankfurt contributed to this story. To contact the author: cermak@handelsblatt.com

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