When he got the invitation to speak at the Handelsblatt Economic Club, Carsten Kengeter, the chief executive of the German stock exchange operator Deutsche Börse, had intended to talk about how he saved his organization’s merger with the London Stock Exchange, or LSE. But that was before the €29 billion ($31 billion) deal was scuttled, with the final nail in the coffin being delivered by the European Commission.
The break down of the merger marked the third time that a fusion between the German and British exchanges had failed, yet Mr. Kengeter was still happy to appear before the club’s members and talk about his plans for Deutsche Börse’s future.
Those plans will, however, depend on whether he is allowed to stay on as CEO. Mr. Kengeter’s three-year contract expires next year and the company’s supervisory board has yet to renew it. Board members say they are waiting for the results of an investigation into accusations of insider trading against Mr. Kengeter, who has denied any wrongdoing. Such an act is something “I could never square with my ethics,” he said.
German prosecutors are looking into whether Mr. Kengeter knew about the possibility of a merger when he purchased €4.5 million worth of Deutsche Börse stock in December 2015, using an option in his contract. He says the shares are subject to a holding period until the end of 2019.
“The project was made even more relevant by Brexit. Unfortunately, it was also made more difficult.”
When asked whether he was interested in continuing his work at Deutsche Börse, Mr. Kengeter said yes, but added: “I’m not going to force it.” Further inquiries into whether he would forfeit his bonus this year in light of the failed merger and the ongoing criminal investigation were promptly dismissed. “I don’t know what I’m supposed to have done wrong,” he said, adding that it was clear from the very beginning that the deal with the LSE might not go through.
That deal was supposed to unite Europe’s two most powerful financial centers, London and Frankfurt, into a European super-bourse. The combined power would have allowed it to compete with market operators from the United States and Asia.
“The project, which we approached with courage and foresight, was made even more relevant by Brexit. Unfortunately, it was also made more difficult,” Mr. Kengeter told the audience.
Deutsche Börse, it seems, will have to make do with organic growth and, possibly, smaller acquisitions.
One of the reasons the deal fell flat was that both sides had agreed to headquarter the new entity in London. But that was before the Britons voted to leave the European Union. Following that momentous decision, there was much upheaval in Frankfurt about the choice of location, and accusations were lobbed against Mr. Kengeter for having sold out the time-honored seat of the Frankfurt Stock Exchange.
Mr. Kengeter was also criticized by some German politicians for what they said amounted to a “maximum degree of naivety.” Thorsten Schäfer-Gümbel, a high-ranking Social Democrat in the state of Hesse, where Frankfurt is located, said Mr. Kengeter had vastly underestimated the political dimension of the merger deal – a criticism the Deutsche Börse CEO accepted.
“That may indeed be the case,” Mr. Kengeter said, adding: “We didn’t completely meet the need for a conversation with the public.” He failed to successfully convince the German side of the merits of the merger.
Ultimately, it was the EU Competition Commissioner Margrethe Vestager who spoke the last word on the deal, effectively killing it off. She was afraid the newly fused entity would dominate the derivatives market too heavily as the LSE refused to separate itself from an Italian subsidiary.
Mr. Kengeter said he wasn’t in the market for any new mega deals at the moment. “I don’t see any big mergers that would be attractive for us,” he said. Deutsche Börse, it seems, will have to make do with organic growth and, possibly, smaller acquisitions. That’s just as well. At the moment, there aren’t really any other major players in a buying mood, either.
The CME Group, the world’s largest futures exchange, is steaming along perfectly fine on its own with an operational profit margin of 60 percent. Joining forces with another exchange would only serve to water down its successes.
The Intercontinental Exchange (ICE), which operates the New York Stock Exchange, would be a more likely candidate, except that it prefers to retain full control over the entities it absorbs. Since 40 percent of the LSE belongs to banks, it would likely be denied such omnipotence.
As for the future of Deutsche Börse, Mr. Kengeter explained to the audience at the Handelsblatt Economic Club his plans for turning the company into a “state-of-the-art stock exchange.”
One of the first deals Mr. Kengeter made for the company could provide a model for what that future could look like. In 2015, when he was hired as CEO, Deutsche Börse took over the 360T forex trading platform. The company wanted to capitalize on the fact that an ever greater number of businesses are conducting their currency transactions over regulated platforms. Although the volume of forex trades over such platforms hasn’t taken off as rapidly as expected, the acquisition demonstrated Mr. Kengeter’s appetite for innovation.
That appetite has also led him to put significant hopes into so-called “blockchains,” digital ledgers that record transactions in bitcoins or other cryptocurrencies. He has said that in the future, he believed such technology could make settling securities transactions more efficient.
At the economic club, one of Deutsche Börse’s major stakeholders said he hoped Mr. Kengeter stayed at the helm. “We’d like to keep him onboard,” said the fund manager, who asked to remain anonymous. But he also added that Mr. Kengeter wouldn’t survive another failed deal.
Michael Brächer has been a financial editor in the investment team in Frankfurt since January 2013. Daniel Schäfer is head of Handelsblatt’s finance pages and is based in Frankfurt. Robert Landgraf is the deputy head of Handelsblatt’s finance section and is based in Frankfurt. Katharina Slodczyk works at Handelsblatt’s London Bureau. To contact the authors: firstname.lastname@example.org