There has been no shortage of high-profile failed ‘mega-mergers’ between trading venues in the past. News of the rejection of the London Stock Exchange’s (LSE) proposed merger with Deutsche Boerse this week certainly echoed that of other failed mergers.
In the past, the deciding factors have been similar; monopoly and competition concerns, the refusal to sell certain businesses to settle these fears and the potential for creating of an invincible exchange powerhouse.
Several high-profile failed mergers include an array of counterbids between NYSE Euronext, its rival Nasdaq and Intercontinental Exchange (ICE) and Deutsche Boerse.
As with the LSE/Deutsche Boerse merger, competition concerns were raised and never settled over a proposed merger between NYSE Euronext and Deutsche Boerse in 2011.
European antitrust regulators formally opposed a merger between Deutsche Boerse and NYSE Euronext in 2012 due to fears it would create a quasi-monopoly for European derivatives traded globally on exchanges.
The European Commission explained together, the two exchanges would control more than 90% of global trade in these products and new competitors would be unlikely to enter the market successfully.
Commission vice president in charge of competition policy, Joaquín Almunia, explained the derivatives market is “at the heart of the financial system and it is crucial for the whole European economy that they remain competitive.
“We tried to find a solution, but the remedies offered fell far short of resolving the concerns."
Make me an offer I can’t refuse
Both venues offered to sell NYSE Euronext’s Liffe European single stock equity derivatives products, but the Commission concluded divested assets would be too small and not diversified enough to be viable on a stand-alone basis.
Neither proposed to sell overlapping derivatives products but offered to provide access to the merged company’s clearing for some categories of ‘new’ products, the Commission also said.
Further problems were encountered when Nasdaq OMX joined forces with the Intercontinental Exchange (ICE) to make an $11 billion counterbid for NYSE Euronext, but this was eventually rejected again due to concerns around competition.
Both venues had also proposed to sell businesses to appease the regulators, as did Deutsche Boerse and the LSE, but it was not enough to settle concerns.
The Justice Department’s antitrust chief executive, Christine Varney, explained at the time: “The acquisition would have removed incentives for competitive pricing, high quality of service and innovation in the listing, trading and data services these exchange operators provide to the investing public and to new and established companies that need access to US stock markets.”
At the time, the removal of Nasdaq and ICE from the picture led to many believing the merger between Deutsche Boerse and NYSE Euronext would go ahead, but they too failed in their plans.
Similarly, the proposed mega-merger between LSE and Deutsche Boerse all but ended when the LSE refused to sell its MTS fixed income business to settle competition concerns.
One step too far
The Commission raised issues in February over bond and repo trading feeds provided through MTS and urged the LSE to sell its majority stake in the business. The LSE had previously proposed the sale of its French clearing unit, LCH SA, to settle the Commission’s competition concerns, but this was rejected as being sufficient.
In December last year, both exchange groups stated the Commission’s concerns had narrowed following its proposed sale of LCH SA, and Euronext made an all-cash offer of €510 million for the clearing business.
LSE said it regarded the required MTS remedy as disproportionate and highlighted its importance in the role of trading Italian government bonds.
The group also said any change of control of MTS would require complex regulatory approval and therefore “it is highly unlikely that a sale of MTS could be satisfactorily achieved, even if LSE were to give the commitment.”
In Asia, the Singapore Exchange (SGX) and the Australian Securities Exchange (ASX) announced plans to merge in 2010, but the $8 billion deal was officially rejected in 2011 by the federal government in Australia.
Treasurer Wayne Swan said the merger could diminish Australia’s economic sovereignty and in particular it threatened the country’s control of clearing and settlement.
Swan took advice from the Federal Investment Board in Australia who warned “not having full regulatory sovereignty over the ASX-SGX holding company would present material risks and supervisory issues impacting on the effective regulation of the ASX's operations, particularly its clearing and settlement functions.”
Not all doom and gloom
In light of this, the government official described his decision as a ‘no-brainer’ and added: “To diminish Australia's economic and regulatory sovereignty over the ASX could only be justified if there were very substantial benefits.”
Mergers between exchanges have not all been unsuccessful though. Chi-X Europe - established in 2007 - was sold to Bats Global Markets for $300 million in 2011 after it sailed through the competition authority’s investigation with seemingly no problems at all.
More recently, the Chicago Board Options Exchange (CBOE) completed its acquisition of Bats Global Markets in a cash and stock transaction valued at $3.4 billion. The merger has provided CBOE - which has avoided takeovers and acquisitions in the past - with a gateway into the European equity and exchange-traded fund (ETF) markets.
Again, national and competition authorities approved the transaction with no real issues being raised before it was processed.
In 2013, ICE completed its takeover of NYSE Euronext for $10.9 billion and it is still considered by many as the most significant exchange mega-merger of all time. The Commission raised little concerns over the merger at the time, as the two venues were not considered ‘direct competitors’. The transaction saw ICE become one of the largest derivatives trading venues globally.
The LSE/Deutsche Boerse merger hit issues from the get-go with Brexit dominating questions early on about how the UK’s exit from the European Union would affect the deal. ICE was also tipped to make a counterbid for the LSE in response to the proposed merger with Deutsche Boerse. Eventually, Brexit put the exchange operator off moving forward with plans to enter into talks about a bid.
Furthermore, Deutsche Boerse’s chief executive, Carsten Kengeter, came under investigation following a purchase of shares made shortly before the proposed merger was announced.
On 14 December 2015, the newly appointed CEO, Carsten Kengeter, is said to have purchased shares in Deutsche Boerse worth around €4.5 million. Just two months later, the exchange operator announced its plans to merge with LSE.
In a statement, firm confirmed there is an investigation into the share purchase but added that Kengeter was encouraged by the board to acquire a stake in the exchange to show he was committed to the company when he joined as CEO in late 2015.
Even as this particular mega-merger chapter closes, questions remain about Euronext’s €510 million offer for LSE’s French-based clearing house LCH.Clearnet S.A. Looking back now, it would appear the merger was in many ways ‘doomed to fail’, with countless obstacles thrown at both parties since the plans were announced.