Deutsche Börse Interview

Yes We Can Make a Deal

Kengeter-Bostelmann-Bildfoliofor HB
Deutsche Börse CEO Carsten Kengeter sat down for an interview about beer, apple wine and the biggest merger of stock exchanges that Europe has ever seen.
  • Why it matters

    Why it matters

    Deutsche Börse and London Stock Exchange are hoping to create a European super exchange that can rival major competitors ICE and CME in the United States.

  • Facts

    Facts

    • The deal, which is worth $30 billion, will lead to the creation of the world’s third-largest trading platform. It is still subject to approval by regulators and shareholders.
    • If the tie-up goes ahead, a new holding company will be created with its headquarters in London, while each of the operators will maintain their own head offices in London and Frankfurt respectively.
    • The merger is expected to result in up to 1,250 job cuts, but Mr. Kengeter says they will be achieved by attrition.
  • Audio

    Audio

  • Pdf

These days Carsten Kengeter spends a lot of time in his adopted home in London, angering some back in Frankfurt who say he is neglecting his roots and turning his back on Germany’s financial capital.

However, the chief executive of Deutsche Börse revealed in an interview that he is still in touch with his German side, entering the meeting room on the 19th floor of the company’s headquarters in the town of Eschborn, near Frankfurt, with a spring in his step and beer bottles in his hand.

After enthusing about the local bars, he poured a glass of German beer for his guests before the interview began.

A former Goldman Sachs banker and head of Swiss bank UBS in London, the 49-year old rose to the helm of Deutsche Börse last year and began his tenure with a flurry of acquisitions. He started this year off with another bang, announcing a planned “merger of equals” with the London Stock Exchange.

Mr. Kengeter, who heads Germany’s largest stock exchange operator, is hoping soon to lead a European superpower of sorts that can rival the biggest stock exchange operators in the world. He will become the head of a new holding company, should a $30-billion merger with the London Stock Exchange announced earlier this year go through.

If things go as planned, the merger means Mr. Kengeter may spend even less time in Frankfurt. The joint Deutsche Börse-LSE holding company will be headquartered in London.

But a lot can happen between now and the closing of the deal: Politicians on either side of the Channel are wary of their financial capitals losing influence; numerous regulators, including in the state of Hesse where Deustche Börse is located, still have to approve the takeover; and shareholders of both companies have to give their blessing in July as well.

And then there is this month’s big political event standing in Mr. Kengeter’s way: Britain’s June 23 referendum on whether to remain in the European Union.

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Mr. Kengeter is well aware of Deutsche Börse’s past failures – this marks the third time it has tried to take over LSE – and freely admitted there remain a whole series of hurdles to the latest deal: “Of course it is possible that the merger still won’t come together,” he told Handelsblatt. But he remains hopeful that, this time, all the hurdles can be cleared.

Even a possible British exit from the European Union leaves him undeterred. Mr. Kengeter has repeatedly said the merger will not be affected by the referendum’s outcome, though it could be a political minefield. The biggest challenge: Mr. Kengeter admitted to Handelsblatt that a “Brexit” could prompt a rethink about whether the headquarters should be in London.

What follows is the full interview with Deutsche Börse’s chief executive.

Handelsblatt: Mr. Kengeter, since we’re on the subject of drinking, which do you prefer the local Frankfurt specialty, Apfelwein, or British cider?

Carsten Kengeter: Apfelwein, what else? And definitely not mixed with lemonade.

But there must be something you like better about London than Frankfurt?

London is and will remain the financial capital of Europe. London has the highest capital turnover, there are international investors there who want to invest money in Europe. It’s precisely those customers that we want to look after better by merging.

Yet there’s a widely held view in Frankfurt that the planned merger with the London Stock Exchange is only good for Deutsche Börse and not for the city.

On the contrary. By building a bridge to London, and thereby to the biggest financial center in the world, we’ll be giving Frankfurt and the German economy a direct link to the world’s largest financial center.

Frankfurt is and will remain the financial center of the entire euro zone and the gateway to Europe's biggest economy.

Everyone will benefit! Besides, neither Frankfurt nor any other cities on the continent will manage to catch up with London as a trading center. The most recent study by [German bank] Helaba showed that.

Shareholders on both sides now have to make a decision. Do you think they will approve the merger?

We hope that our plans will meet with widespread approval from shareholders on both sides.

Why should investors support the deal?

The business models of the two exchanges complement each other to a large extent. Together we can offer our shareholders – as well as customers and employees – significantly more potential. Investors can expect an accelerated growth strategy.

Does that mean shareholders can hope for a higher dividend?

We are aiming for a progressive dividend policy.

You’ve promised that Frankfurt will remain the “city of the DAX,” referring to Germany’s blue-chip index. But what about the other parts of the stock exchange that are much bigger than equity trading?

To put it very clearly, there are no plans to relocate the sites of Eurex or Clearstream, for example, out of Frankfurt. It would be an own goal from a business perspective if we changed this, as Frankfurt is and will remain the financial center of the entire euro zone and the gateway to Europe’s biggest economy.

And if we’re sitting here in five years, will there still be two head offices in London and Frankfurt under the holding company?

Absolutely. That’s enshrined in the merger agreements.

FrankfurtBull-picture alliance-Associated PR
Frankfurt hopes to remain the euro zone’s financial capital. Mr. Kengeter promises a merger won’t change that status. Source: Picture Alliance / Associated PR

 

The fact that the headquarters of the holding company will be in London comes down to pressure from the British government. The French are also defending their interests and criticizing the merger plans. Only the German government doesn’t want to intervene. Do you feel like you’ve been betrayed?

No. The German government has a neutral position here, as in similar cases. I won’t presume to comment on what other governments say, as I’m not a citizen of those countries.

But the argument put forward by the French that a European super-exchange will adversely affect competition in Europe is very convincing.

Competition will not be threatened by the merger. On the contrary, we will make a massive contribution to the regulatory aim of making the markets more stable. At the same time, the European regulators will ensure there is enough competition.

It’s not just regulators, but also customers who have expressed concerns. Some institutional investors fear that the new super-exchange could charge higher fees. Will your customers soon have to pay more?

Compared with all its competitors, Deutsche Börse currently has a very competitive fee model. We see no reason to change anything about that in future.

02 p27 Merging Frankfurt and London's Stock Exchanges-01 deutsche börse london stock exchange lse boerse

Tarek Al-Wazir, the economy minister of Hesse, is only allowed to approve the deal if he believes that the exchange’s survival is not under threat. What would you say to him?

That the merger will add significant value and that the new company will have a very broad base. And that it will therefore have a much better chance of guaranteeing its own survival and ensuring that it continues to develop.

A total of 1,250 jobs are expected to be lost as a result of the merger. Who’s to say that you won’t impose another efficiency program in a year or two?

We’re not planning that at present. We are aiming for growth rather than cuts. That’s why we want the merger.

One could get the impression that you’re deliberately stating a low figure in order to convince the state government of Hesse.

We have a clear growth strategy. That means we want to offer new services and products and thus create new jobs. We are, after all, aiming for revenue synergies of €250 million ($279 million). Our offer document has also been examined, so we can’t make any arbitrary changes. We’re also aiming to avoid compulsory redundancies. In addition, I’d like to mention that we expect organic growth at the future company to lead to employment opportunities.

So you can rule out the possibility that an additional program of cuts will be announced in the medium term?

Under the current market conditions and if we implement this merger as planned, that question won’t arise. We are aiming to avoid compulsory redundancies now and in the future, as we have done in the past.

You have warned in the past that Deutsche Börse could become a candidate for a takeover. The fate of Euronext, the multinational exchange, is an example. But if the holding company has its headquarters in London, doesn’t that risk also apply to Deutsche Börse?

That’s the difference between an acquisition, like in other cases, and a merger of equals, like we are aiming for. And we’re in a highly regulated business, which is also advantageous if we want to avoid such a fate.

Will you and other members of the executive board receive a bonus if the merger is a success?

The supervisory board and shareholders decide on payment for executive board members. There are no agreements to that effect in our contracts.

And does the chief executive of a super-exchange receive a super-salary?

The board will also decide on salaries at the merged company.

Let’s talk about Brexit. What impact would it have on the merger?

I hope it doesn’t come to that. But the result of the referendum is not a condition for the merger. The business logic still works regardless. And if Britain votes for Brexit, the links between London and Frankfurt would be at least as important as they have been until now.

Farage-AP
Mr. Kengeter insists that UKIP leader Nigel Farage and his fellow “Brexiters” will have no impact on Deutsche Börse’s plans to merge with London Stock Exchange. Source: AP

 

But the conditions for a merger of equals wouldn’t really be fulfilled then. The British financial sector would be severely damaged in the event of a Brexit, and thus so would the market value of your merger partner.

I see it differently. Brexit would cause just as much turmoil for the European Union as for Britain. I don’t expect the LSE to lose value either, because it has a global structure – and these global connections would remain in place even after a Brexit.

Many banks are considering whether to transfer large parts of their business to the euro zone in the event of a Brexit. Wouldn’t the LSE lose customers if that were to happen?

Even Brexit wouldn’t stop London from remaining the most important financial center in the world.

That means the exchange ratio for shareholders wouldn’t change?

Exactly. The exchange ratio will stay the same.

There has been criticism in Germany of the fact that the legal head office of the merged stock exchange could be outside the European Union in the event of a Brexit. Would the issue of location be renegotiated if Britain were to leave?

We have set up a referendum committee to look at the consequences of a Brexit for the merger.

However, it’s clear that a Brexit would also change the regulatory framework for the merger, so we may have to adapt our plans to a new reality. But I don’t want to pre-empt anything.

So the question of location would be back on the table?

The committee is discussing and examining all relevant issues.

What do you expect to happen in the referendum?

I won’t make a forecast – but I’ll make no secret of the fact that I’m a staunch European.

Deutsche Börse and the LSE are heavyweights in the settlement of transactions, or clearing. The head of the French central bank is therefore warning about risks to financial stability if the merger goes ahead. What is your response?

I see it completely differently. The clearing houses of the two exchanges will not be merged, they will keep their current structure. At the same time, regulators will get a better insight because both clearing houses will have to report in accordance with the same standards. That will make the system safer overall.

Couldn’t Deutsche Börse also grow on its own initiative?

We will naturally continue to focus on organic growth. But it has become apparent in our sector that that alone will not suffice. That’s precisely why we want to merge with the LSE. It’s the best option for us.

What other options would there be?

There are naturally various conceivable combinations. But I’m convinced that this merger is the best option.

What happens if the deal fails?

I don’t want to use the word fail. The merger will create lasting value for both companies, their shareholders, customers and employees and the financial system as a whole. Of course it is possible that the merger still won’t come together despite this. Then we’ll have to think about alternatives. But it must be clear to all those involved that the world will then be a different place from what it has been up to now.

Do you mean that other competitors could then acquire the LSE?

I don’t want to comment on that. But we can’t expect everything to stay as it is. That’s completely clear.

Could Deutsche Börse itself become a takeover target?

Possibly. I don’t want to spread panic, but it’s the way of the world – our competitors will think about taking other steps.

If the deal with the LSE fails, will Carsten Kengeter also have failed as a dealmaker?

I strive to develop Deutsche Börse in the interests of shareholders, customers and employees. So that’s not an issue for me.

Before you joined Deutsche Börse you were a banker. Could you imagine returning to the world of banking in a few years’ time?

I think my knowledge and experience have been well received here at Deutsche Börse. We need people with customer experience here. I followed this reputation and I wouldn’t like to jeopardize it with any kind of speculation. I want to do my work here, irrespective of whether or not the merger goes ahead. We’ve got a lot to do here at the moment.

 

Daniel Schäfer heads Handelsblatt’s finance section in Frankfurt. Michael Brächer covers exchanges, banks and markets for Handelsblatt in Frankfurt. To contact the authors: d.schaefer@handelsblatt.com and braecher@handelsblatt.com

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