LSE-DB MERGER When Pros Become Cons

Deutsche Börse had hoped that a study it commissioned into the proposed merger with the London Stock Exchange would help sway opinions in favor of the deal. But the report has not gone down well in the UK.
The London Stock Exchange on Paternoster Square in the U.K.

The new year started in a lively fashion at Germany’s stock market operator, Deutsche Börse, with live music and salmon canapés. The exchange’s chief executive Carsten Kengeter was welcoming investors at a reception for some of the world’s top financiers.

Guests at the high-profile event included Larry Fink, the chairman of Blackrock, the world’s largest asset manager, and also the second largest investor in both the Deutsche Börse and the London Stock Exchange, or LSE.

But two VIPs were notable by their absence: Xavier Rolet and Donald Brydon, respectively the LSE’s chief executive and chairman.

While the organizers of the reception said it was simply a matter of scheduling, LSE insiders told another story.

They claimed that the reason for the pair’s absence was their annoyance with Deutsche Börse and the way it had presented the results of a recent study it had commissioned.

The main bone of contention in the study, written by Dirk Schiereck, a professor and the chairman of corporate finance at Technische Universität Darmstadt, was the conclusion that, while a merger between the two exchanges presented enormous opportunities, growth could – in a post-Brexit landscape – be at the expense of London.

Deutsche Börse has a good chance of winning significant long-term market share ... and relocating trading from London to Frankfurt. Dirk Schiereck, Corporate Finance, Technische Universität Darmstadt

 

The plan to merge the two exchanges, which would see both investment platforms operate under a joint holding company to be based in London, was announced last spring and before last summer’s Brexit referendum.

The European Commission competition authorities are currently looking into the proposed merger.

Despite the report’s conclusion that Frankfurt, rather than London, would be the main winner from the merger, many in Frankfurt still fear the opposite.

Another of the report’s controversial conclusions was that Frankfurt could become “the European center for financial market regulation and, simultaneously, Frankfurt might indeed become the European center for supranational risk management."

In the report, entitled “Why the merger between Deutsche Börse and the London Stock Exchange will strengthen Frankfurt as a financial center,” Mr. Schiereck also wrote that the proposed merger presented Deutsche Börse with the opportunity to move significant portions of the LSE's derivatives trading from the U.K. to Germany.

"Deutsche Börse has a good chance of winning significant long-term market share in the areas of interest rate and currency trading, and relocating trading from London to Frankfurt - if the market participants in London are given unrestricted access to superior trading platforms in Frankfurt," he wrote.

But on Monday the LSE hit back at the report saying it had “no intention” of relocating “certain of its businesses” if the merger with Deutsche Börse is approved.

Both exchanges are "committed to maintaining the strengths and capabilities of their respective operations in London and Frankfurt," the LSE said. And there are no plans to move business units to other locations, the statement said. Any statements to the contrary were “incorrect and misguided.”

So in the end, a report that was supposed to have helped the mega-deal in Frankfurt has ended up raising existential questions about the wisdom of pressing ahead with it in London.

“It was handled badly and should have been better presented,” said one industry insider in London.

Questions about the report are also being asked in Germany. According to Volker Brühl, managing director of the Frankfurt Center for Financial Studies, the report is “unbalanced.”

“Essential questions were simply not answered - for example, with regard to the effects of Brexit,” Mr. Brühl argued.

Despite the criticism and the controversy, Mr. Schiereck has defended his work saying that the report “is an economic study which weighs all arguments fairly.”

The professor added that he had not examined the possible consequences of Brexit, as negotiations about the U.K.’s departure from the E.U. had not even got underway.

He also denied claiming that the LSE would simply become a business unit of the Deutsche Börse, saying that his comments about business moving to Frankfurt were only concerned with off-exchange trading.

It’s hard to know how the Londoners are taking that. Still, while Mr. Rolet and Mr. Bryden may have missed the new year’s party, on Tuesday they did attend a high-level meeting with Hesse’ state premier Volker Bouffier and the state’s economics minister Tarek Al-Wazir.

The meeting is potentially significant as the state of Hesse, of which Frankfurt is one of the largest cities, has to do the final sign-off on the deal. A spokesman for the government of Hesse said that during the meeting, Mr. Bouffier briefed both stock exchanges on the “political environment” surrounding the proposed merger. It all sounded more like thinly sliced bread, than salmon canapés.

 

Robert Landgraf is deputy head of Handelsblatt’s financial news section. Michael Brächer is a correspondent for Handelsblatt in Frankfurt, covering banks and the financial sector. Katharina Slodczyk is Handelsblatt’s London correspondent. To contact the authors:[email protected][email protected][email protected]