NEW YORK/LONDON Major exchanges that are planning to link up are acutely aware of national pride as they put their deals together.
In a bid to appease politicians and regulators, they are calling their deals "mergers" rather than "acquisitions" that leave one group of shareholders owning more of the company. They may also be limiting the cost savings they promise because layoffs likely would not play well politically.
At about the same time the London Stock Exchange Group (LSE.L) was beginning serious talks with Canada's TMX Group Inc (X.TO), Canadian regulators were blocking Australian mining giant BHP Billiton (BHP.AX) (BLT.L) from buying Saskatchewan's Potash Corp (POT.TO), bringing political issues into sharp focus in the LSE-TMX calculations, sources familiar with the situation say.
While there was no cause and effect between the Potash deal falling apart and the LSE-TMX talks starting up, the former deal's failure profoundly influenced people working on the latter.
"That deal really shifted the game," an industry source said. "That (BHP) decision just amplified how important it was to take into account all these different constituents and to think about how a transaction would need to be structured in order to acquire the necessary approvals."
Sources familiar with Deutsche Boerse's (DB1Gn.DE) planned tie-up with NYSE Euronext NYX.N cite similar concerns, which has spurred them to try to structure the deal as equally as possible.
"If either party is perceived as getting the upper hand here, the political constituencies in their home markets could seek regulators to get involved in a negative way," one of the sources said, referring to the NYSE-Deutsche Boerse deal. "The fact is we worked hard to create a balanced, genuine merger of equals."
Both exchange deals, news of which broke within hours of each other, draw executives from all sides to create balanced governance structures and top management.
Deutsche Boerse and NYSE would combine under a new legal entity incorporated in the Netherlands, and have dual headquarters in New York and Frankfurt.
In the LSE-TMX deal, the combined transatlantic group will be jointly headquartered in London and Toronto, and listed on both exchanges.
"This transaction stacks up extremely well in terms of what you would think of a true merger of equals," one source said, referring to the LSE-TMX deal.
Despite these steps, tell-tale signs of a takeover remain.
Deutsche Boerse is expected to pay a modest premium to NYSE and in return get some advantages in governance such as more board members. The German exchange's shareholders would hold 59 to 60 percent of the combined company.
LSE's shareholders will own 55 percent of the combined company, and the London exchange will nominate eight of the 15 board members. Although, three of those eight are expected to be from Borsa Italiana, which LSE bought in 2007.
Under U.S. and global accounting rules, there cannot be mergers: a business combination must be structured as one company acquiring another. Pooling of interests accounting, which is conceptually a merger of two companies into a third new company, is no longer allowed.
Companies that promise a merger don't always deliver on that pledge.
When Daimler-Benz AG agreed to buy No. 3 U.S. automaker Chrysler Corp in 1998, it repeatedly touted the deal as a "merger of equals" and said it was a "perfect marriage."
But in 2000, then Daimler Chrysler Chairman Juergen Schrempp told the German financial daily Handelsblatt, "The merger of equals statement was necessary in order to earn the support of Chrysler's workers and the American public, but it was never reality."
Political fears may also prevent deals where potential cost savings could be greater through overlaps, a source said.
"If you are going to participate in a deal for a lot of synergies you are going to have to give up some stuff and some businesses are going to be lost," one source said. "Is that really what's best for the Canadian capital markets? And I think the answer that people arrived at was, No."
Deals are easier to do on equal terms when both companies have about the same market value.
TMX weighed its other options, including a transaction with Australia's ASX (ASX.AX), before settling on LSE as the best fit, sources said. TMX has a current market cap of about $3.2 billion, while LSE is worth $4 billion.
"If we want to participate in consolidation we will need to partner with someone who is relatively similar in size," the source added. "And so from that perspective, this was a pretty natural combination."
In the case of NYSE and Deutsche Boerse, sources said one of the factors that made the deal possible now was the smaller valuation gap between the two companies, although the German exchange is still roughly 50 percent larger in terms of market value.
"This happened to be a time where from a valuation perspective the companies were a lot closer so that a merger of equals made more sense," one of the sources said.