29 Mar 2017

LSE-Deutsche Borse merger failed because of Brexit?

The European Commission announced that it blocked the Deutsche Borse-London Stock Exchange (LSE) merger. The announcement was expected after the LSE publicly lashed out at the deal in February.

The Commission reported the merger was blocked on the same day that Theresa May triggered the Article 50, which commences the start of the negotiations for Brexit. The European Commissioner for competition, Margrethe Vestager, speaking to journalists confirmed the rejection of the deal. She said that “the Commission can’t allow the creation of monopolies, and this is what would have happened in this case. And this is why we have prohibited this merger, for the benefits of competition in Europe in financial markets, to the benefit of European business and therefore European citizens.”

The Commissioner was asked several times if the decision related to the United Kingdom leaving the European Union. “The UK is part of the EU until it is not anymore, which means it is a part and parcel of the legislation and the merger review. Triggering negotiations today isn’t the end of the procedure, but the beginning of the procedure,” she answered, despite some analysts’ belief that the block is part of the EC’s retaliation tactic.

The merger of LSE and Deutsche Borse would have created a European trading powerhouse, which would hold a powerful position in stocks, bonds and other financial instruments. The EC reported that a merger of this kind would have hurt competition, increase costs and making more expensive every procedure that involved moving sums of money in the system. The Danish Commissioner was asked if Brexit will influence the Commission’s decisions concerning future deals. Vestanger replied that “I remind you that we cleared a merger between Dow and DuPont, on Monday. The companies addressed the EU’s concerns and the deal got the green light. We deal with any company that has a footprint in the European market, because we want competition no matter your flag and no matter the ownership.”

The EC blamed the LSE for the failed merger, because it denied complying with the selling of the Italian MTS platform. The LSE denied following the EC’s instructions, saying that the EC “unexpectedly” asked the company to sell its majority stake in the Italian bond trading platform, giving a tight deadline. The LSE stated that “the Board believes that it is highly unlikely that a sale of MTS could be satisfactorily achieved, even if the LSE was to give the commitment.” Analysts said that the LSE waited until the last possible moment to take its first steps to meet the EC’s demands to remedy antitrust situations.

Bill Cash, a British Conservative MP, had spoken in the House of Commons against the deal between the British and the German company. “It is inconceivable, in the UK national interest, that the LSE should be regulated in and operated out of Germany as we leave, and having left the EU.” In March, British politicians and City of London executives had written to the Times outlining the political risks of the merger.

The finance ministers of France, the Netherlands, Belgium and Portugal opposed the merger from the very beginning. The reason is, that these countries have subsidiaries of the Euronext stock exchange on their soil. Euronext is a smaller, but important rival of the two companies that wanted the merger to fail.