“Merger of equals” between the LSE and the Deutsche Boerse lopsided? Against whom?

The proposed merger between London Stock Exchange and Deutsche Boerse has begun to detail itself as less than a ‘merger of equals’ and has attracted a rather unsavory political diatribe.

The two traditional exchanges have spent the last few months working to keep London and Frankfurt happy in the hopes of seeing the deal going forward.

However, after first catering to London’s worries by promising that derivatives trading should remain there plus a savings of £400 million a year of operational costs (merging overlapping parts of businesses and savings programs), now resistance is coming from the German side, with fears of an eroded financial hub status in Frankfurt.

After a failed merger attempt in 2001 and a failed takeover in early 2005, valuing the LSE at £1.35 billion, some are skeptical to this year’s “merger of equals”. Carsten Kengeter, CEO at Deutsche Boerse, defends that the European financial business must gain scale in order to become globally competitive, and while Germany’s exchange is quite profitable and such a deal would mean an implicit dilution of earnings to shareholders, he sees London Stock Exchange’s complementary business, with an impressive growth multiple expansion and globally diversified trajectory to be attractive to German interests.

A merger would actually put the new European exchange as the first in Europe and second in the world by market capitalization, just over $30 billion, two billion dollars behind the CME group.
While currently silent, ICE (Intercontinental Exchange) has shown interest in acquiring the London Stock Exchange and has until tomorrow to make a bid, under UK takeover rules. There were also rumors of interest by the CME and the Hong Kong stock exchange.

Former Deutsche Boerse director Manfred Zass considers the deal as damaging to Frankfurt’s standing, calling it an “investment banker fairy story” and that the “merger of equals” where the boss sits in Frankfurt while the domicile gets to be in London creates a “recognizably lopsided Frankfurt”, he told German magazine Boersen-Zeitung.

Politicians seem to share the thought, with former Eschborn (Frankfurt suburb) mayor Wilhelm Speckhardt to call it an “unimaginable catastrophe for the town”.

Mr. Kengeter, Beutsche Boerse CEO, is confident that the deal will be made, regardless of the result of the UK referendum in deciding whether or not to stay in the European Union. The deal is expected to be complete in Q1 2017. The last time a Deutsche Boerse CEO attempted a M&A with the London Stock Exchange, he was forced to resign by the main shareholders.

The “merger of equals” will retire LSE CEO Xavier Rolet and distribute ownership in a less equal fashion: 45.6 percent to LSE shareholders and 54.4 percent to the Deutsche Boerse owners, reflecting market capitalization.