By Victoria Hines
 |
| Photo: Flickr.com/jam_90s Creative Commons License |
The London Stock Exchange Group (LSE) and Deutsche Boerse
announced a
deal to merge in February of 2016. In addition to creating a rival in
derivatives trading, the merger would result in one of the of the largest
exchange operations in the world, with more than 5.2 trillion euros in equities
traded and 3,200 listed companies. However, the deal, which already had its
challenges, is now facing an even more uncertain future after the recent Brexit
vote.
Many stakeholders,
including German politicians and Germany's largest association of small investors, are either claiming the deal is dead or urging
Deutsche Boerse to cancel the merger. They argue that Brexit, the UK's decision
to leave the European Union (EU), undermines the desirability of the deal's
terms. The prevailing concern is in
regards to the plan to locate the merged companies' headquarters in London. If
Brexit materializes by the UK invoking article 50
of the Lisbon Treaty, these actors do not want its headquarters to be
supervised outside the EU.
Despite Brexit
complications, the two exchanges claim their
merger will continue. In response to claims by critics, CEO of Deutsche Boerse
Carsten Kengeter stated: "Having group companies located outside the EU is
not a deal-breaker by any means."
Even though Brexit has led to a proliferation of
complaints, concerns regarding the merger arose long before the vote. Germans complained
about the decision to base the new exchange group in London since the merger's
announcement. The fact that a German will initially head the company has not
quelled German fears because there is nothing in the deal preventing a
non-German successor. Other issues articulated with basing the new holding
company outside the Eurozone include the loss of the German company's identity and
the dissolution of Frankfurt as a financial hub. German parliament members have
repeatedly spoken out
against the deal; they argue that the new holding company should be based in
Frankfurt because Deutsche Boerse is worth more than LSE and there is no risk
of Germany leaving the European Union.
The Brexit vote is already creating new
uncertainties, which raises the question of what would happen if the new
company were to falter. Would the European Central Bank (ECB) bail it out even
if it were no longer based in the EU? If
the new holding company were to fail, it seems likely that the bank would feel
compelled to step-in. However, neither company has specified which bank will
bear the oversight responsibility and this uncertainty may be reason enough for
Germans to block the deal.
A deal failure may not solely be attributed to Brexit,
but also to other competition concerns. Months before the Brexit vote, antitrust
regulators raised the concern that competition in clearing and settlement will
be reduced. A similar sized merger between the NYSE Euronext and Deutsche
Boerse was blocked by
the EC about four years ago because it would have given the new company too
much market share. Moreover, a deal
between the two exchanges previously failed due to antitrust concerns.
The fate of the merger will be decided soon: LSE
shareholders will vote on the deal on July 4, while Deutsche Boerse
shareholders' tender offer closes on July 12. The outcome will likely have at
least a symbolic effect on the future of the EU and its relations with Britain.
