Why are Germany's and Britain's stock exchanges merging?

The transaction joining the London Stock Exchange and German Deutsche Börse to form a new European exchange group is expected to be finalized within a year.

Michael Probst/AP
The entrance of the Deutsche Börse stock market in Frankfurt, Germany.

Two of the world’s largest stock exchanges agreed to a deal that will combine the two markets into a “European trading powerhouse” with an increased capacity to contend for global stock listings.

The London Stock Exchange Group plc (LSE) and Deutsche Börse AG of Germany plan to close their all-shares-merger transaction within the fiscal year, according to an LSE release. The merger will establish a new holding company headquartered in the United Kingdom, UK TopCo, while maintaining the regulatory frameworks of London’s LSE and Frankfurt’s Deutsche Börse.

“We are creating an industry-defining combination which will be a leading global market infrastructure business, very well positioned to create new benefits and efficiencies for our customers and increase value for our shareholders,” LSE CEO Xavier Rolet said. “Our highly complementary businesses will accelerate growth… We will create a European leader in global markets infrastructure.”

“Strengthening the link between the two leading financial cities of Europe… will strengthen European capital markets. It is the logical evolution for our companies in a fundamentally changing industry,” said Deutsche Börse CEO Carsten Kengeter.

The move that will join the world’s third- and tenth-largest exchanges by market capitalization is designed to advance both sides’ growth and enhance their presence on the global market. The $30 billion deal will see UK TopCo take control of hundreds of billions of dollars in gross assets from LSE and Deutsche Börse.

Assuming acceptance of the move, shareholders with the German exchange will control 54.4 percent of UK TopCo, while LSE shareholders will own 45.6 percent of the new entity. LSE investors would also be entitled to 0.4421 UK TopCo stocks for every one of the London company's, while Deutsche Börse shareholders would receive a one to one stock exchange rate.

The merger marks the first success out of three attempts at a consolidation between Deutsche Börse and LSE; in 2000 the groups announced plans to contend with the European Union (EU)’s Euronext exchange by merging, but a Swedish exchange’s bid for LSE put that merger on hold. And while Deutsche Börse came back in 2004 with an LSE takeover offer, the move was denied by the London group early in 2005. Since then, LSE has also rejected acquisition offers from NASDAQ while merging with Milan’s Borsa Italiana SpA in 2007. Deutsche Börse missed out on a Euronext merger in 2006.

“We strongly believe this is the right transaction at the right time for our two companies,” Mr. Kengeter said to Reuters. Kengeter will become the chief executive of UK TopCo once the deal goes through, while LSE Chairman Donald Brydon is set become UK TopCo’s chairman and Mr. Rolet will step down to become Mr. Brydon's adviser. Both LSE and Deutsche Börse will have equal representation on the TopCo board of directors, balancing company control between Frankfurt and London interests.

The deal’s proposed timeline could run alongside a possible British withdrawal from the EU, a political maneuver that will be voted on this June in the UK. Acknowledging that potential shift, LSE and Deutsche Börse established a committee to address the ramifications on UK TopCo should a “Brexit” occur, but the exchanges’ leaders do not believe such a move would end up affecting the combined group.

“We will be having a successful transaction irrespective of the Brexit outcome,” Kengeter said.

The merger must still receive competition clearance from regulators of other large global market authorities in the United States, Russia, and EU, and must undergo “formal regulatory approval” in several European countries and the US. Despite those pending measures, Kengeter is confident the deal will be set within by first quarter 2017, per the combined group’s plans.

“We feel confident about the process,” he said to Reuters.

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