“Merger of equals” draws nearer as London Stock Exchange enters crunch talks with Deutsche Boerse for improved offer

“Another day at the coalface” is a phrase that FinanceFeeds CEO Andrew Saks-McLeod will always remember during a discussion with mild-mannered former London Stock Exchange CFO Jonathan Howell some ten years ago during the acquisition by London Stock Exchange of Borsa Italiana at a time when the venue’s Paternoster Square facility was a lesson in ultra-modern design.

Now, the institutional trading sector is quite a different place indeed as the discussions between two of the world’s most prominent traditional stock exchanges, London Stock Exchange and Deutsche Boerse, entered their final stages yesterday evening as the two venues worked on finalizing the terms of their proposed merger.

London Stock Exchange is regarded as one of Britain’s most prestigious institutions alongside the Bank of England and lagacy underwriting and reinsurance firm Lloyds of London, the main market being home to the stock of many international blue chip companies.

Deutsche Boerse and London Stock Exchange have been working on – and have pretty much agreed – a £20 billion merger which would place them as a tour de force among European exchanges.

The two exchanges may well be traditional and long-established, London Stock Exchange itself describing the proposed integration as a ‘merger of equals’, however the opportunity to acquire the London venue had become appealing to one of Chicago’s ultra-modern, electronic network of exchanges and clearing houses Intercontinental Exchange Inc (NYSE:ICE) which last week became interested in acquiring the London Stock Exchange, going head to head with Deutsche Boerse.

At the beginning of this month, ICE, which also owns the New York Stock Exchange, was considering making an outright bid to purchase the London Stock Exchange, which would put an end to the £20 billion M&A talks between London Stock Exchange and Deutsche Boerse if it had been successful, however it is becoming clear that this will now not proceed.

With the UK referendum on its membership of the European Union approaching, concern has been voiced among industry critics that a merger between London Stock Exchange and Deutsche Boerse could hand control to Germany, therefore creating an exodus of derivatives trading in London, however an improved offer for London Stock Exchange could now emanate, with promises of cost saving of £400 million and a promise that derivatives trading will remain in London, the international home of institutional electronic trading.

London Stock Exchange CEO Xavier Rolet will step down after 7 years in his leadership position, and still it is unclear as to whether Detusche Boerse CEO Carsten Kengeter will assume the role of Group CEO of the merged entity.

Donald Brydon will remain chairman of the London Stock Exchange, however he is due for retirement in three years time

In terms of the final deal, the original schedule handed 54.4% of the combined company to shareholders of Deutsche Boerse, and 45.6% to London Stock Exchange shareholders to reflect the market value of both companies.

It is understood that the increase in the share price of the London Stock Exchange may be a factor which could lead to a revised and improved offer from Deutsche Boerse, which may include cash.

In a move that was seen as an attempt to bolster its hand, Deutsche Boerse last week agreed to sell its US options exchange operator International Securities Exchange for £770 million to Nasdaq, which could be a means of stemming a bidding war should any further transatlantic electronic venues show interest in the wake of ICE’s enthusiasm two weeks ago.

Deutsche Boerse, post merger, is being advised by many to keep the London Stock Exchange’s crucial clearing operation SwapClear which settles trades in complex interest rate derivatives, in London.