By almost any measure, 2017 was an annus horribilis for Deutsche Börse. The German stock-exchanges operator is still wincing from a failed merger with the London Stock Exchange, a top-level criminal probe, and a slashed earnings forecast in a year that began with high hopes.
Deutsche Börse’s biggest shareholders, including asset management giants BlackRock and Artisan Partners with a combined holding of over 11 percent, are expecting new CEO Theodor Weimer to guide the company into calmer waters in 2018. The former McKinsey consultant and erstwhile head of UniCredit’s German subsidiary HypoVereinsbank succeeds Carsten Kengeter, who stepped down last October after a long-running investigation into alleged insider trading. (Mr. Kengeter denied any wrongdoing.) The main issue now for Deutsche Börse is to restore “internal credibility of the management board and the supervisory board,” said Ingo Speich, a portfolio manager at Union Investment in Frankfurt.
Bristling with ambitious plans, Mr. Kengeter shook up Deutsche Börse after taking office in the summer of 2015, reshuffling the executive board of directors and creating group-wide units for marketing and product development. However, it was never clear how these units should mesh with existing business departments, and the new structure had too many chiefs and too few Indians. Staff are counting on the new CEO to give the company a clearer, leaner structure, and to show more appreciation for their opinions and the current business model than Mr. Kengeter did.
“[Deutsche Börse] has a comfortable and robust business model. It does not necessarily need a visionary at the top.”
Determined to ram through a merger with the London Stock Exchange, or LSE, the brash Mr. Kengeter had warned that Deutsche Börse would otherwise fall behind in the race to grab that market share of derivatives-clearing business that is likely to flee London after Brexit. “This is a company that has done many things right for many years,” grumbled one employee. Case in point: In 2016, Deutsche Börse’s operating profit margin was a whopping 46 percent – a result that many competitors could only dream of. Its cross-platform mix of securities trading, clearing and administrative services, seen by some critics as too fragmented to work on a grand scale, nonetheless guaranteed an enviable level of profitability.
“Deutsche Börse is not a restructuring candidate,” said Mr. Speich, the Union Investment fund manager. “The company has a comfortable and robust business model. It does not necessarily need a visionary at the top.” Still, Germany’s securities exchanges are feeling the effects of competition from off-exchange platforms, and need to tap new fields of growth. Brexit stands to significantly expand Deutsche Börse’s clearing business, noted Mr. Speich.
In October, Deutsche Börse said it would miss its 2017 profit forecast of a 10 to 15 percent increase, blaming cyclical developments on the financial markets. But it is sticking to this benchmark for 2018 and 2019.
For the time being, the bulk of Euro-denominated derivatives trades is settled in London. But after Brexit, banks and investors could be forced to relocate Euro clearing from the UK to one of the other 27 countries in the EU. Leading contenders are Euronext, the Belgian-Dutch-French deriviatives exchange, and Eurex, the Frankfurt-based derivatives subsidiary of Deutsche Börse, both of whom are already jostling for market position.
Apart from clearing, some of Deutsche Börse’s shareholders feel it should expand its securities administration, energy trading and data business. The company has already been looking for opportunities to acquire providers of index and financial data, as their valuations have recently shot up, according to one large shareholder.
But after getting burned on the LSE merger, investors and employees are lining up to say Deutsche Börse should avoid any merger or major acquisition in the next few years. For the best part of two decades, Deutsche Börse tried repeatedly to wed with other exchanges, including the LSE in 2000 and the short-lived NYSE Euronext in 2008-09 (the latter went to America’s Intercontinental Exchange a few years later). The prevailing opinion is that mergers of major stock exchanges in Europe generally do not work, and that European politicians see their domestic exchanges as too important to hand over in an international link-up.
The winds have also changed among Deutsche Börse’s shareholders, who had once supported the merger with the LSE. None of its big investors expects Deutsche Börse to present another merger plan in the foreseeable future, says one of the company’s top 10 shareholders.
The changed priorities should give Mr. Weimer time to heal Deutsche Börse’s bruised reputation. Its relationship with the Frankfurt financial community has been strained since relocating its headquarters to the dormitory town of Eschborn, about 10 kilometers outside the city, in 2010 to save on business taxes. It also incurred the ire of the Hesse state government, which part-supervises Deutsche Börse’s activities, by pursuing mergers that would have moved the company’s legal domicile abroad.
Some investors would have preferred a younger, more down-to-earth, more technocratic boss than the extroverted, piano-playing Mr. Weimer, who turned 58 on December 21. But they trust him to run the gauntlet between global ambitions and regional politics better than his predecessors. During his stint as an investment banker at Goldman Sachs, Mr. Weimer advised on the 2005 takeover of Frankfurter Sparkasse by deep-pocketed regional bank Helaba, in which the state of Hesse holds a stake. And in his nine years as HypoVereinsbank’s boss in Munich, the native Bavarian was careful to keep a home in Wiesbaden near Frankfurt, and maintained his contacts with the state government. For Deutsche Börse’s new boss, it’s not a bad place to start.
Andreas Kröner is a financial correspondent for Handelsblatt in Frankfurt. Jeremy Gray is an editor for Handelsblatt Global in Berlin. To contact the authors: kröner@handelsblatt.com, firstname.lastname@example.org