Market mergers at risk
Politics is again blocking attempts at consolidation among stock exchanges
Attention was beginning to shift to London, the hotly contested competition for its up for sale metal exchange, and perhaps even its stock exchange yesterday, as Deutsche Börse began a furious rearguard action to save its attempt to merge with the New York Stock Exchange.
With regulators saying the Deutsche NYSE deal should be blocked (to London's relief) on competition grounds, the only option open to the two companies' chief executives, Reto Francioni and Duncan Niederauer, is a direct appeal to EU commissioners in the hope they will ignore their own watchdogs.
The two men – who have been meeting in New York – will try to sell the deal to them as creating an EU champion capable of taking on the Chicago Mercantile Exchange, which enjoys a derivatives monopoly in the US.
They will likely fail. It is extraordinarily rare for commissioners to overturn such a ruling. And even a finely honed political company such as Deutsche will find its work cut out given that Germany's attempt to force fiscal prudence on the union isn't making it hugely popular.
If, as expected, the deal fails, it will join the London Stock Exchange's (LSE's) attempt to pull off a merger with Toronto and Sydney's proposed tie up Singapore in the dustbin of history.
"It does look as if the whole thing has stalled, perhaps for some time," said one exchange watcher. "It might take years for things to get going again."
Politics as much as anything else killed off the latter deal, and helped ruin the former given the motivations of some of Toronto's more nationalistic shareholders whose votes stopped the merger from clearing the 75 per cent shareholder approval hurdle.
But Martin Abbott, chief executive of the London Metal Exchange (LME), doesn't think deals are dead. Yesterday he talked of a "very healthy number of bidders" interested in meeting a price tag likely to hit £1bn for his exchange.
To bolster his case he published data showing volume jumped 22 per cent last year to a record 146.6 million lots, with the value of trades up 32.8 per cent to $15.4 trillion (£10 trillion). With numbers like that, maybe the exchange has managed to make more than the pitiful £12.5m profit it generated in 2010.
But there is another reading on the LME's popularity: exchange deals are so difficult to do that when one is willing and able to open its doors to a suitor, everyone wants in on the action.
Among the 15 or so companies involved in the chase and under the scrutiny of the LME's board next month are thought to be Icap, the LSE, several Asian exchanges and even the Chicago Merchantile Exchange.
Although the LME has about 80 per cent of global futures trading in metals, the exchange is a unique property and it is unlikely that a deal will be killed off on the same grounds that the Deutsche NYSE deal has apparently been shot down.
The two, believe EU regulators, will dominate derivatives trading to an unhealthy degree. Mr Niederauer says this analysis is "fundamentally flawed" not least because it fails to include the substantial "over the counter" derivatives market (which the EU would ironically like to see brought under the wings of an exchange or two). Icap, the LSE and other rivals think otherwise and have vociferously objected.
The two unlucky chief executives will likely point to the Chicago Mercantile Exchange's monopoly in the US, arguing that Europe needs a "champion" to compete with it. Rivals say that isn't the point: they argue the merged company (it was never given a name) would be an over-mighty silo with the power to close the door on them.
With the deal in its death throes, what next for the two prospective partners?
Their merger is as much defensive as anything else, particularly for the NYSE, which still boasts an antiquated, open outcry trading floor and wants to avoid becoming an irrelevance.
Deutsche remains a big beast with a big derivatives business (in the form of Eurex). But it has repeatedly failed to pull off deals. It has twice made a run at the LSE, and put in a failed bid for Liffe, the London futures exchange, before the latter's takeover by Euronext. These are just the more famous flops.
Andreas Preuss, the head of Eurex, is due in London towards the end of the month, but probably won't say much.
Could either one, however, look to the LSE? It has Europe's largest cash equities market, but is no more than a medium-sized group in global terms with a need to bulk up its derivatives offering. The LSE is pursuing a tie up with LCH. Clearnet, which sits between buyers and sellers and guarantees trades if one side blows up. That will likely escape regulatory sanction (Deutsche might huff and puff, but it owns a similar operation).
It is also listed in an open market where political considerations that hamper deals elsewhere don't appear to hold as much sway.
The trouble is the LSE has a canny chief executive in Xavier Rolet who isn't keen to sell. Relations with Deutsche are poor, and the LSE has twice successfully rebuffed hostile approaches from the US (both tabled by the Nasdaq).
Perhaps the only avenue open to a potential suitor is the LME. The LSE's failure to buy Liffe crippled it strategically. The LME isn't that sort of prize, but there isn't much left after it has gone.
With an auction process in full swing, if Mr Rolet is tempted to overpay it could open an opportunity for a rival to swoop. But Mr Rolet knows this and is too clever to have entered the LME race without having sounded out his powerful Asian shareholders first.
The LME may really be the last game in town, at least for now.
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