The London Stock Exchange (LSE) and Deutsche Boerse are walking a tightrope. As well as attempting to persuade shareholders and regulators to approve their £21bn merger, the tie-up has also attracted passionate interventions from politicians in the UK, Germany and elsewhere.
In Westminster, attention has been drawn to two facts: that Deutsche Boerse’s chief executive would take on the same position over the merged company; and that the German company’s investors would get 54.4 per cent of the combined entity’s shares. “Is this 1944 by stealth?” George Osborne was recently asked when facing questions before the Treasury Select Committee. (He said it wasn’t.) In Germany, politicians have focused on the fact the joint headquarters, or the holding company, would be based in London.
Considering both companies will continue to base their existing operations where they are now, London and Frankfurt, how significant an effect will the deal have?
“For who?” asks Jeffrey Tessler, a member of the Deutsche Boerse executive board since 2004. “For people in the UK or people in Germany? When I come here people sometimes say to me: ‘300 years of independence down the drain, the German guy’s going to run the company!’ And you go to Frankfurt and they say: ‘TopCo’s in the UK!’”.
The location of the holding company is clearly seen as important by both sides. And despite the fact sources close to the deal have insisted it is “non-negotiable”, questions persist. How binding is this commitment?
“I couldn’t imagine a scenario where five years down the road we would say: ‘Okay, now we’re going to move it someplace else,’” says Tessler.
“One of the things that we have to recognise is that London plays a special role here. I’m American and I even believe that in many [ways] London is the financial capital of the world.”
He adds: “That’s a value to the transaction. Why would anyone want to destroy the value that’s coming to the transaction by having the location in the UK?”
The water becomes a little murkier when the prospect of Brexit comes up, though. “What we’ve done [in relation] to Brexit, and all things that follow from Brexit – because we’d be entering the unknown – we’ve set up a referendum committee,” he says. “These things haven’t really been
discussed yet and quite frankly they’re not actively being discussed now because we certainly hope there is no Brexit.”
Details aside, the boards of Deutsche Boerse and the LSE have made clear that a UK exit from the European Union would not be a deal-breaker. “We hope Brexit does not happen –obviously it’s a decision for British people, but I think the right thing is for things to stay as they are and we can follow through on our growth plans.
“But, if it [does] happen, the deal still makes sense. And the deal makes sense because it goes from being a pan-European deal to being a cross-border transaction. Geographically, there’d still be a lot of trade between Europe and the UK. But it makes so much more sense without a Brexit.”
He adds: “In my opinion, the UK is a vital part of Europe and for the European experiment to continue to grow I think this transaction would be at the centrepiece of future growth and be absolutely necessary.”
Tessler describes the LSE-Deutsche Boerse deal as “the last chance for Europe” and talks up the prospect of creating a “global powerhouse to stimulate economic growth”.
“To [stimulate growth], you need a capital market that’s vibrant. And at the base of a capital market would be a capital markets infrastructure. It’s hard to have a capital market without a capital markets infrastructure.
“And so what we have today are a number of good players in the market. But when I think about the future, and this is what gets me kind of excited, the idea of Deutsche Boerse and LSE becoming a global powerhouse, located in Europe, is exactly what Europe needs right now to stimulate growth.”
He adds: “If it doesn’t happen, and let’s say the infrastructure is owned by a US player, they don’t have the same interest in developing [it]. We have a home-grown interest in developing [it]. I have an interest – I have my pension in Europe! I want to see this thing work.”
Tessler believes Europe’s need for the merger will see it pass the hurdles it needs to succeed, saying Deutsche Boerse is “highly confident” it will go through.
“This makes sense,” he says. “And this is much different than where we found ourselves in 2011 when we had discussions with the New York Stock Exchange.” Deutsche Boerse’s deal was rejected in 2012 by the European Commission on antitrust grounds.
“And it’s much different than previous attempts by LSE and Deutsche Boerse to try to get together,” he adds.
“I don’t think [antitrust is] a hurdle that can’t be surmounted. But it definitely is a hurdle because you have to jump over it and prove to them that this will be good for the markets.”
Analysts covering the deal are less certain, with Credit Suisse, Exane BNP Paribas, Numis and Morgan Stanley all warning over the hurdles faced in recent weeks.
Tessler describes the LSE merger as “the perfect deal at the perfect time”, adding: “It would be a shame for the deal not to go through.”
However, if it does not, chief exec Carsten Kengeter has made clear the company will be seeking other deals, suggesting Deutsche Boerse could become a target for Chicago-based CME Group. Tessler agrees that his firm would be looking for deals elsewhere.
“Listen, it’s a global market,” he says. “Our ability to partner on a global basis is not limited by the fact that we’re located in Europe. But the overwhelming value of this transaction, not only for the two companies but for Europe, to me, is quite clear.
“So yes, there’s always something, we’re not going to disappear tomorrow. There’s always something else to do, we could find new partners.”