LSE and Deutsche Borse Merger: The True Cost of the Deal

"The 75% vote requirement had to be lowered to 60% to ensure the deal was passed, an indication of how keen CEO Carsten Kengeter and the Deutsche Borse board are on doing the deal. Kengeter is to become CEO of the combined organisation. The deal now has to pass regulatory, competition and political approval. Each will require its own concessions. Will the deal still be worthwhile after the many likely accommodations? How much of the €450M savings will be achieved?

"A benefit to Deutsche Borse shareholders is that if some markets have to remain in the EU, which are currently in London, then Frankfurt will be well placed to provide a home due to their LSE links. They will also develop a stronger global presence through London, the dominant trading centre in the time zone. The LSE benefits through maintaining a strong position within the EU markets.

"EC competition authorities still have to clear the deal as does the German state of Hesse. The process may take a year and both will have their demands. Hesse will want a Head Office in Frankfurt whilst the EC will want some trading activities to be within the Eurozone, for example Euro derivatives clearing.

"The clearing houses of LCH.Clearnet and Eurex will probably have to remain separate due to the ’too big to fail’ concerns. Other European stock exchanges notably Belgium, Portugal and Paris are already lobbying against the deal.

"Teresa May, the new UK Prime Minister, is keen on allowing government greater powers to stop takeover deals viewed as being against UK interests. As this deal will be protracted due to EC and German clearance it may still fall foul of UK Government wishes to keep the Head Office in London. Expect a legally binding promise to be extracted for a London Head Office, as appears to be the case for SoftBank and Arm.

"The consequences for the LSE and Deutsche Borse are twofold. First many of the planned savings will simply not happen. There are likely to remain many duplicate activities in London and Frankfurt to appease the various regulatory and political authorities. 1250 job losses have been announced without indication of where these will fall. Will they ever happen?

"Delay over regulatory clearance and attempts to integrate could take two years. Staff will be concerned at the prolonged uncertainty and those that can leave may do so.

"Both businesses will likely lack forward momentum and lose business. Ultimately the savings and many of the job losses may not happen and by the time uncertainty is resolved much damage is likely to both the businesses.

"In short the merger may well happen but the likely delays and integration uncertainty may mean that any benefits are offset by business decline. European, US and Hong Kong stock exchanges are likely to be the beneficiaries. Many mergers have trodden this particular path before the LSE and Deutsche Borse."