The year 2012 saw the Deutsche Börse call off an effort to merge with the New York Stock Exchange (NYSE) after European antitrust regulators formally opposed the deal. Now Germany is set to try such a deal once more – this time with the London Stock Exchange (LSE).
Deutsche Börse and LSE have a history dating back to 2000, when the first attempt to merge ran into resistance from LSE shareholders who had concerns about how the combined exchange would be regulated. Deutsche Börse returned in 2004 with a $2.5bn offer, but abandoned its plans following opposition from its own shareholders.
The timing of its latest efforts, however, has been of much debate. But the news arguably couldn’t have come at better time – a few days after prime minister David Cameron returned from Brussels with an agreed set of reforms designed to keep Britain in the EU. This included securing a commitment to exempt Britain from “ever closer union” – to be written into the treaties – and a four-year “emergency brake” on in-work benefits.
But while the prospect of Brexit heightens volatility in the UK, Germany’s chancellor Angela Merkel has said she wants the UK to stay in the EU. That hasn’t stopped her from warning that businesses are quietly preparing for the possibility that it would leave and that the possible merger of the two stock exchanges should be seen as such.
According to the Financial Times, the two stock exchanges combined would be able to help customers cut the costs of trading derivatives by allowing them to post less collateral than they normally would.
This was also highlighted in a statement about the merger, where the two exchanges said: “LSE and Deutsche Boerse believe the potential merger would offer the prospect of enhanced growth, significant customer benefits including cross-margining between listed and OTC derivatives clearing, as well as substantial revenue and cost synergies and increased shareholder value.”
Furthermore, if the deal were to go ahead it would create a clear market leader for Europe, making it one of the largest exchanges in the world for trading and risk managing derivatives. It is the latter point that has boosted talk of the stock exchange merger.
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European exchanges have been facing intense competition from US counterparts, and a combination of the two European companies could help fend off that pressure.
Deutsche Börse has a large derivatives business through Eurex, its futures trading venue, an area in which LSE is absent. The British stock exchange is stronger in terms of cash markets and post-trade businesses. Combining would give both operators the opportunity to scale and build on a lot of the product line gaps between the two exchanges.
Another reason why the merger is likely to go ahead is the deal made by The European Central Bank and the Bank of England that strengthens the financial backing of British clearing houses in the handling of euro-denominated securities – ending a long-running legal battle.
However, the deal faces a number of challenges, with both the LSE and Deutsche Börse having trade-clearing businesses big enough to threaten the financial system if it were to fail – not to mention antitrust concerns that were the cause of the Deutshe Börse and NYSE falling through.
And in addition to shareholders, regulators from the UK and Germany would need to approve, as well as the European Commission. It means there is no doubt that the talks are likely to attract particularly intense scrutiny as Britain debates whether it should leave the EU.
Nonetheless, the ability to create a European Champion and one of the largest stock exchanges in the world is an incredibly attractive offer, Brexit or no Brexit.
If you can’t get enough of the Brexit debate then read our piece looking at how it highlights fractious nature of seemingly harmonious teams.
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