Leadership Question

Deutsche Börse-LSE Merger Sparks Debate

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Analysts were divided Wednesday over whether the Deutsche Börse and the London Stock Exchange would successfully pull off their proposed merger of equals to create the world's No. 2 or 3 trading platform. Much will come down to the ability of both CEOs, Carsten Kengeter of the Deutsche Börse, and Xavier Rolet of the LSE, to sell the deal.
  • 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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A day after Deutsche Börse and the London Stock Exchange announced plans to merge, debate raged in the German and British financial capitals over the wisdom and terms of the proposed deal.

Pundits and financial experts questioned the exchanges’ plans to enter a “merger of equals” dominated by the German exchange but with the key decision-making split, Solomon-like, equally between the two platforms.

In Frankfurt, where Deutsche Börse is based, a columnist for the Frankfurter Allgemeine Zeitung newspaper criticized the deal’s proposed concessions to the British exchange, saying such a fusion wouldn’t make sense unless the headquarters of the combined operation was based in Frankfurt, not London.

The two exchanges on Tuesday indicated that they would run dual headquarters in London and in Eschborn near Frankfurt, where Deutsche Börse has its headquarters, according to information obtained by Handelsblatt.

“It should be clear that the new combined exchange can only have its headquarters in Frankfurt and that the chief executive should only be someone from the Deutsche Börse,” wrote Daniel Mohr, a columnist for the FAZ.

If those conditions weren’t met, Mr. Mohr wrote, then “the price for the merger would be too high.”

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

Carsten Kengeter, Deutsche Börse

Shares of Deutsche Börse dipped 1.2 percent in early trading in Frankfurt, down 94 euro cents to €78.05 per share, after rising by as much as 8 percent on Tuesday. The German exchange stock had gained 12 percent since February 11 in the runup to the merger announcement. Shares of the London Stock exchange were relatively unchanged Wednesday after rising 13 percent on the news.

“Deutsche Börse has been the leading exchange in Europe for eight years,” Mr. Mohr added. “London is only strong in stock trading and in IPOs, but has much more liquidity. Deutsche Börse should not allow this leading role in Europe be taken from it in a rush toward a big merger.”

Mr. Kengeter, in an effort to calm some of the concerns, assured that equities trading – a key element of its business and source of jobs in Germany – would not be moved away from Frankfurt. “You can assume that that won’t happen,” he said at an event Wednesday, according to news agency Reuters.

In London, initial commentary surrounding the potential fusion, the third attempt to unite the exchanges, was mixed. Some saw the development as inevitable in the face of the LSE’s waning global influence.

Others saw the attempt to unite with the German rival as a hedge against financial damage and isolation should British voters in a June 23 referendum decide to take their country out of the European Union.

 

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“If the marriage of the London Stock Exchange and its German rival can finally be consumated, it is likely to be a good deal for clients and investors, creating a strong European powerhouse with international tentacles which would be well suited to the ever-changing regulatory landscape,” wrote James Quinn, the group business editor at the London Daily Telegraph newspaper.

Mr. Quinn noted that Qatar Holding and BlackRock, which together own almost 20 percent of the LSE, would play a key role in whether the merger went through.

The Deutsche Börse and LSE announced their plans Tuesday to 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.

Britain’s conservative euroskeptic mainstream press was less positive about the deal. The tabloid Daily Mail headlined an editorial “Go Home Deutsche Börse,” arguing the merger could not have come at a worse time with the country in the middle of a referendum about whether to remain in the European Union.

Andreas Pläsier, an analyst at German bank Warburg, told clients he wouldn’t rule out a possible counterbid for LSE by a major U.S. rival that feared being crowded out of the European market. He didn’t name the potential counterbidders but those might include CME, Nasdaq or the Intercontinental Exchange, the group of 11 global exchanges that includes the New York Stock Exchange.

 

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Carsten Kengeter, the Deutsche Börse CEO, says he wants to make the German exchange company the world’s largest. Source: DPA

 

“Although the combined business is not focused on the U.S. market in our view, the chances of U.S. players succeeding in the European market would shrink significantly” if the merger goes ahead, Mr. Pläiser wrote. “For this reason we would not rule out measures by these competitors to reduce the benefits for DB1 and LSE.”

Mr. Pläsier said the E.U. antitrust regulators will also look closely at any deal, especially because the Deutsche Börse and LSE would jointly own Europe’s largest clearing houses, LCH Clearnet and Eurex Clearing.

The German state of Hesse, where Frankfurt is located, could also block the merger. The state’s economy minister, Tarek Al-Wazir reacted to the news Tuesday with surprise: “Information that would allow a proper analysis of the plans is not yet available.”

Indeed, sources in the financial sector said news of the deal spilled out into the open before either side was ready. There was no opportunity to establish contact with governments and regulators to iron out the details.

Thorsten Wenzel of Germany’s DZ Bank told clients that while he was maintaining his “buy” recommendation for Deutsche Börse’s shares, it was far too early to assess whether the chances of this merger happening are any better than in 2004.

On Tuesday, the two exchanges acknowledged they were discussing a “merger of equals,” though Deutsche Börse is setting the tone in the talks, according to financial sources. The German firm has a higher market value and its shareholders would hold a nominal majority in any new holding company, but the newly-created company would have a single executive board with equal numbers of Deutsche Börse and LSE managers represented.

 

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Together, the companies are valued at more than €27.3 billion, or $30.1 billion, making it likely the second-largest stock exchange operator in the world behind the Chicago-based CME Group, the world’s largest derivatives exchange. A fused Deutsche Börse-LSE would have roughly the same market value as the New York-based Intercontinental Exchange or ICE, a network of 11 global exchanges including the New York Stock Exchange. Deutsche Börse’s market capitalization is currently 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.

The merger has not yet been finalized, both sides stressed. The talks were “ongoing regarding the other terms and conditions of the potential merger.”

The company’s headquarters would be based both in Eschborn just outside Frankfurt and London, to stress that the deal  is a “merger between equals,” sources told Handelsblatt.

There were not details yet on who would take the helm.

Any merger would have to be approved by regulatory authorities, which is far from certain.

 

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The 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.

Some of that optimism may be the result of faith in the new man now at the helm of Deutsche Börse. Mr. 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 net revenue 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.

 

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

 

LSE Chief Executive Xavier Rolet, a French citizen, 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.

One warning bell should also be ringing in Mr. Kengeter’s ears. The last time Deutsche Börse attempted to take over LSE in 2004, the plan was thwarted by a major hedge fund and shareholder, TCI. The collapse of the talks wound up costing then-chief executive Werner Seifert his job.

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 isn’t 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 much closer to his goal.

 

Kevin O’Brien is editor in chief of Handelsblatt Global Edition in Berlin. Christopher Cermak is an editor with Handelsblatt Global Edition. Handelsblatt correspondents in Frankfurt contributed to this story. To contact the author: obrien@handelsblatt.com and cermak@handelsblatt.com

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