Deutsche Boerse and the London Stock Exchange think their union will be a good idea regardless of whether Britain stays hitched to the European Union. But they are clearly aware that others – such as, perhaps, their shareholders – might be less certain. Hence their attempt to deflect any scepticism.
The two companies said on Feb. 26 that the combined group would be domiciled in London. But they also pledged to create a so-called Referendum Committee to consider the implications of a British vote to exit the EU. Its findings are unlikely to challenge the strategic rationale presented for the merger. The two exchanges are a good fit, with complementary geographical and product spread, and should offer margin savings to clients. And a combined mega-exchange has a better chance of thriving in an industry where the biggest usually do best.
But the latest joint statement issued by Deutsche Boerse and the LSE contains a hint of what the committee could find – that the volume or nature of the business of a combined group might be affected if Britons were to vote to leave the EU in the June 23 referendum. Given this tacit nod to concerns that London might suffer as a financial centre, the rational thing to do might have been to domicile the combined group in Frankfurt, rather than London as planned.
But this merger, like many others, is a delicate balance of compromises. The companies have confirmed that Deutsche Boerse’s chief executive, Carsten Kengeter, would become group CEO and that his LSE counterpart, Xavier Rolet, would step down. Basing the combined group’s headquarters in Germany would make the deal look more like a Teutonic takeover than the merger of equals it is supposed to be. This matters, given Deutsche Boerse doesn’t look like it is paying a particularly generous premium, according to Breakingviews calculations.
If the committee were to decide that the group needed an EU domicile post-Brexit, LSE investors can draw comfort from the fact that its views are non-binding. Deutsche Boerse will hope that the committee’s presence is enough to persuade its own shareholders they aren’t being led blindfolded into a deal that is hostage to a highly uncertain political event. The success of the deal may hinge on whether the two views can co-exist.