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What, exactly, were their competitors up to? With NYSE Euronext’s shares having risen 6pc in early trading and those in Deutsche Börse following a similar pattern, rumours circulated that the two had been suspended on their own markets.
Within 30 minutes of the LSE/TMX conference call, a statement was issued that confirmed the two smaller exchanges’ worst fears: the Americans and Germans were in 'advanced’ talks about a combination of their own. Blowing the £4.2bn London-Toronto merger out of the water, the New York-Frankfurt tie-up would be valued at about £14.4bn and control 94pc of European futures and 28pc of European equities.
After four relatively quiet years, the silence surrounding exchange consolidation was shattered by the race for repositioning as the world’s largest bourses attempt to move into growth markets, cemented by the biggest day for deal announcements in the industry’s history.
For London, what began as a day full of potential and new growth ended in worries about competition, a lack of dominance, and the City’s place in the new world order.
Although the London and Toronto exchanges had been speaking in-depth for five months, senior staff at both exchanges had known one another for years, furthered by the signing of a strategic partnership two years ago to launch EDX London, a derivatives platform powered by TMX’s SOLA derivatives trading system.
“We all talk all the time,” says Gibson-Smith. “Gradually the volume rose, and all of a sudden we were in full-blooded merger talks.”
However, it is understood the merger was accelerated in part due to the strength of personal friendship between Kloet – who will take on the role of president in the merged structure – and Raffaele Jerusalmi, who runs Borsa Italiana and the LSE’s cash equities market from London.
The two men will work under Rolet, chief executive of the enlarged group; with Fox becoming chairman and Gibson-Smith and Borsa Italiana chief Paolo Scaroni becoming deputy chairmen.
The structure of the planned merger will essentially see LSE Group – the exchange’s holding company – take over TMX in the same way it took over the Italian exchange four years ago.
As a result, local regulators will be able to continue policing their own markets – of which there will be 20 under the combined entity – with the Financial Services Authority (FSA) supervising the parent company. In Canadian circles, this aspect of the deal – and the fact that the LSE will nominate eight of 15 board directors and its shareholders will control 55pc of the overall equity - has not been well received. Not quite the 'transatlantic merger of equals’ it was first billed to be.
“No deal on merger of TMX/LSE” read the headline in the Vancouver Sun. “Proposed TMX/LSE merger will never happen” read the Toronto Star.
In a country where regional politics are often as important as national ones, negative rumblings have already begun.
Dwight Duncan, the Ontario finance minister, is said to be angered that he was given only 24 hours’ notice of the deal – “Control will rest with the other side,” he said. His is one of two provinces – along with Quebec – which has a right to veto the deal, as does the Canadian government.
With this in mind, when Kloet unveiled the deal, he was keen to stress the benefits for his home country, not least the fact that Canadian cities will be the global hub for the combined group’s equity listings, derivatives and energy business, leaving London with international listings, technology and information services. Kloet says: “We looked carefully at the benefits it can bring to Canada’s capital markets.”
Conversely, aware of adverse comment, Gibson-Smith, the LSE chairman of the geographic division of responsibilities, is quick to point out that the UK capital is not losing its power. “We’ve taken the same principle as we did with Borsa Italiana and seen where the best people [are] or best capability is and said 'you’re in charge of this’,” he says. “London’s got the chief executive, board dominance; the whole company will be regulated by the FSA. I don’t think London has lost anything, but we’ve gained Canada.”
Even if the question of nationality and who gains and who loses can be ironed out with politicians and regulators, the question remains as to whether combining London, the tenth largest global exchange, with Toronto, the 11th, will really create the “global exchange powerhouse” Fox predicts.
Even combined, the pair fall short when compared with the likes of the CME, worth $20bn (£12.5m), or the Hong Kong exchange, worth almost $25bn.
Strategically, the deal is a stepping stone for both exchanges, allowing each to access dominance in the other’s market but not squaring the circle in growth terms that access to an Asian bourse would allow.
“The Asian exchanges are all in bubbles and seriously stupidly priced,” says Gibson-Smith, who admits in conversation with The Sunday Telegraph that “you do what’s available at the time”.
However, Elie Darwish, analyst at Exane BNP Paribas, thinks the deal makes sense for both exchanges. “For the LSE, because it helps it further diversify away from under-pressure UK equities, it gives it a critical size and helps build the derivatives franchise.”
She added that for Toronto, the merger of the Singapore and Australian exchanges will create a rival in the natural resource listings, which the London tie-up will bolster.
But the deal is somewhat tinged with a sense that the pair had to merge because of their valuations and what fitted. “It’s the best deal they could have done, as there’s no one else either could have done a deal with,” says a former LSE staffer. “They’ve been limited to marriages of convenience – those who are left at the end of the dance.”
A senior industry source does not agree, however: “It’s blindingly obvious that there is a lot of upside for the users – this cultural affinity based on resources and small and medium-sized companies. After all, they’re the only two exchanges with successful SME markets.”
During the strategic dance of the exchanges from 2004-07, London’s position was always that any bid should carry a premium. That was because of London’s strategic importance as part of the fabric of one of the world’s busiest capital markets and having next to no derivatives business and no clearing operations.
But in this combination there is no premium, which analyst Raul Sinha at Nomura thinks could be a mistake. Sinha said that due to the structure of the deal and the lack of significant valuation premiums, “the potential for a counter bid from another exchange cannot be ruled out”.
That said, there is no way either exchange can stand still given the number of consolidations in the sector. The rationale for this flurry of deals is best summarised by UBS analyst Arnaud Giblat, who lists scale and distribution, technology rationalisation, product development, and positioning for market structure changes as the common themes of the deals on the table.
On top of the merger of Singapore and Australia’s exchanges, and Hong Kong’s announcement that it would also like to be involved in consolidation, the question of cost savings is key. London and Toronto expect to produce £35m of revenue synergies, rising to £100m, equivalent to 8pc of the combined cost base. However, Giblat estimates that cross-border deals usually deliver 15-20pc cost savings. The New York-Deutsche deal, which could be confirmed in detail as early as this week, will create a global exchange powerhouse, with more than $15 trillion of listed companies on its books and the largest provider of futures and options trading. In spite of the pair’s size, however, the need for the deal is obvious. NYSE once controlled 80pc of the trading in stocks listed on its markets. Today that figure stands at 23pc due to competition from Nasdaq OMX but also from trading platforms such as BATS – which is in advanced talks to take over London’s Chi-X platform – and Direct Edge.
But the deal also remains fraught with regulatory and governance problems. Combining London’s Liffe futures exchange, owned by NYSE Euronext, and the Eurex derivatives platform, owned by Deutsche, would give the pair more than 90pc of the European derivatives market. However, this could be vetoed by European regulators, as it was in 2007, which could create possible potential for the LSE in derivatives.
Questions as to where control will lie could yet cause problems. Although it was proposed that Deutsche Börse chief executive Reto Francioni will be chairman – with Duncan Niederauer, NYSE chief executive, keeping the same role in the wider business – the tussle between Frankfurt and New York could be too much to handle. The added aspect of Paris, Euronext’s old headquarters, could cause issues. Regulators from Paris and the German state of Hesse have vocalised their determination to ensure Frankfurt and Paris sit at the heart of the new group.
But these issues pale in comparison to American pride. The fact the deal is structured as a German takeover of NYSE Euronext, with Deutsche shareholders ending up with 60pc of the enlarged entity, resulted in New York Post headlines of “Achtung! Germans taking over NYSE” on Thursday morning.
The deal will be subjected to approval from the Committee on Foreign Investment in the United States. This could be where the deal falls, just like DP World’s takeover of P&O, which forced the group to sell its US operations.
Whatever the outcome of the NYSE’s flirtations with Deutsche Börse, it is London’s position that remains at stake. Using different metrics, it is possible to argue that the Toronto deal is either a defensive merger with an also-ran partner –something LSE management has discounted – or a stepping stone on the path to true global dominance.
But only in the context of the sector as a whole can this be judged, and that is the one thing the LSE, no matter how hard it tries to, cannot control.
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