Brexit Vote Amplifies Complexity of LSE-Deutsche Boerse Merger

By Victoria Hines

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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.