Deutsche Boerse AG and London Stock Exchange Group have agreed to a merger, in a bid to establish the biggest European trading centre.
The agreement would take the form of a merger between equals, giving Deutsche Boerse shareholders a 54.4 percent and LSE shareholders 45.6 percent participation in the new business. The new holding company would be called UK TopCo, it is set to be incorporated in the UK and will have a unitary board with equal representation from both parties. As a result of the merger, both parties hope to achieve an annual saving of €450m.
In reference to plans for a European Capital Markets Union, Carsten Kengeter, CEO of Deutsche Boerse, commented on the merger: “Strengthening the link between the two leading financial cities of Europe, Frankfurt and London, and building a network across Europe with Luxembourg, Paris and Milan will strengthen European Capital Markets. It is the logical evolution for our companies in a fundamentally changing industry. As a combined group we will create a European player that will compete on a global basis.”
However, John Colley, professor of Practice at Warwick Business School, is more cautious on the agreement: “While promoted as a ‘merger of equals’ with top jobs respectively filled by a balance of directors from both businesses, in practice such arrangements rarely work. The chairman is from the LSE, while the deputy chairman and chief executive are from Deutsche Boerse. ‘Mergers of equals’ usually result in a lack of clarity in direction and leadership as both camps jockey for influence.”
It is the third time in 16 years that the two trading centres have attempted to merge, yet there are still challenges to be overcome.
For one, the planned merger might trigger a bidding war, with Intercontinental Exchange, the owner of New York stock exchange and CME Group, the operator of Chicago mercantile exchange, both considering bids for London Stock Exchange Group. A bidding war could delay the agreement and increase the price of London Stock Exchange.
Another challenge is the personality of Carsten Kengeter, who would become CEO of the Holding Company under the terms of the merger. He caught the attention of the UK Serious Fraud Office in 2013 due to his alledged involvedment in the UK Libor Scandal, as the Wall Street Journal reported earlier this week.
Prior to his position at Deutsche Boerse, Kengeter was at senior executive at UBS at during the Libor scandal and, according to former UBS trader Tom Hayes, who has been convicted for his role in the Libor Scandal, Kengeter was familiar with the fact that the Libor rates had been rigged by UBS staff. However, Kengeter was never directly accused of any wrong doing by the Serious Fraud Office and was not listed as a co-conspirator.
The proposed merger will now be subject to regulatory and shareholder approval.