LSE and Deutsche Börse in $30bn merger of equals

May 2016 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The London Stock Exchange Group and Deutsche Börse have announced an all share $30bn ‘merger of equals’ which will create one of the largest exchange companies in the world. LSE-Deutsche Börse would be the world’s biggest exchange operator by revenue and second-largest by market value, sandwiched between CME Group Inc. and ICE.

The merger of the two exchanges will provide synergies of around $499m for three years after the deal is completed, the two companies noted. Once the deal has been completed, Deutsche Börse will own 54 percent of the newly combined company, while LSE shareholders will own the remaining 46 percent of the firm.

In a statement announcing the deal, Carsten Kengeter, chief executive of Deutsche Börse, said, “Strengthening the link between the two leading financial cities of Europe, Frankfurt and London, and building a network across Europe with Luxemburg, Paris and Milan will strengthen European capital markets. It is the logical evolution for our companies in a fundamentally changing industry. As a combined group we will create a European player that will compete on a global basis. Shareholders will have an opportunity to benefit from this industry defining and value enhancing combination through the execution of an accelerated growth strategy and the realisation of cost and revenue synergies. It brings together two of the most respected and successful market infrastructure providers in the world to lead the way in European capital markets and set the benchmark for further growth and best-in-class services.”

There are concerns in some quarters, notably among Deutsche Börse’s shareholders, that the deal may not win regulatory approval. Should the merger fail, however, there will be no shortage of suitors willing to step in. Indeed, counteroffers for LSE may be incoming now that other exchanges know that LSE is in play. Intercontinental Exchange, owner of the New York Stock Exchange and several futures exchanges, has expressed an interest in the LSE.

Once completed, the newly merged company will be headquartered in London and led by Mr Kengeter. LSE’s chief executive Xavier Rolet would step into the role of adviser to ensure a smooth transition. The two companies would enjoy equal board representation in the new entity, which would have almost 10,000 employees and list around 3200 companies with a combined market capitalisation of €7.1 trillion.

Speaking of the deal, Mr Rolet noted, “We are creating an industry defining combination which will be a leading global market infrastructure business, very well positioned to create new benefits and efficiencies for our customers and increase value for our shareholders. Our highly complementary businesses will accelerate growth. Our shareholders will also benefit from substantial cost and revenue synergies. The Combined Group will continue to be fully committed to the real economy, by supporting companies, including the 23 million SMEs across Europe that drive economic growth and job creation. We will create a European leader in global markets infrastructure.”

Though the deal will create a global powerhouse, there is considerable concern about the nature of the transaction. In the UK, the deal has prompted calls for LSE executives to face parliamentary scrutiny. Labour MP John Mann called for executives to be brought before the Treasury Select Committee, pointing out that “This deal might not be in our national interest. Are we handing over control to the Germans? We need to just get up and get them in, and that’s a chance to explore all avenues.”

For Deutsche Börse, there is an element of déjà vu about the deal for LSE. The company tried to buy its British rival in 2005 only to have the acquisition scuppered by its own shareholders who opposed the plan.

Whether the prospect of a potential ‘Brexit’ will impact the viability of the merger remains to be seen. However, if the deal is completed, the new company will present a strong counterpoint to dominant exchanges in the US and Asia.

Richard Summerfield