LONDON, June 7 (IFR) - The proposed US$30bn merger between Deutsche Boerse and London Stock Exchange will help the European financial services industry to remain competitive against the US and Asia, according to the head of the German exchange operator.
The largest global exchange groups are US-based CME Group and Intercontinental Exchange and Japan Exchange Group. European exchanges account for around 20% of global exchange market capitalization, compared with 41% for the US and 33% for Japan.
“US and Asian exchange groups have grown significantly, while Europe has not kept up,” Deutsche Boerse chief executive Carsten Kengeter said on Tuesday at the IDX Derivatives Expo in London. Large US exchanges are “twice the size of Deutsche Boerse in terms of market capitalisation, and also liquidity”.
Deutsche Boerse agreed in March to merge with LSE in an all-share deal that if completed will create the world’s biggest exchange group by income, with full benefits expected in five years.
Deutsche Boerse has a market capitalisation of 15bn (US$17.2bn) while LSE has a market capitalisation of £9.3bn (US$13.5bn). Intercontinental Exchange is valued at US$31.5bn and CME Group has a market capitalisation of US$32.8bn.
“Europe is currently fragmented across jurisdictions, platforms and markets and the way we are going to develop globally is through better partnering,” said Kengeter. “If it doesn’t happen you can see a world in which the big US exchanges won’t talk to me because I am too small.”
“Europe must catch up.”
The combined group, whose name is yet to be announced, employs 8,000 people and expects to lose around 10% of its employees following the merger, according to LSE calculations. LSE’s shareholders will be asked to approve the deal on July 4, after the UK referendum on EU membership on June 23.
Of course, LSE and Deutsche Boerse will need to overcome the kind of regulatory concerns that scuppered Deutsche Boerse’s attempt to merge with NYSE Euronext four years ago. That deal was blocked by the European Commission on competition grounds because it would have created a near-monopoly on exchange-traded derivatives in Europe.
“Last time the EC prevented a big merger because of competition concerns, but the European region is (the smallest) of three at the moment which is a shame because there is no reason why Europe should not be able to compete,” Kengeter said.
Achieving scale will enable European exchanges to offer higher quality products at lower prices, he said, and increase efficiency in post-trade areas such as clearing.
“It will also improve liquidity, which we need to work on with structural solutions rather than just the latest rebate model.”
If the merger does go ahead it may lead to further consolidation among European exchanges. Euronext in May said was on the lookout for tie-ups to increase scale.
“If the world changes around us in a favourable manner we will be in position to capture these opportunities,” Euronext chief executive Stephane Boujnah told journalists at the same event.
Boujnah said Euronext will look at businesses that might be spun off after the Deutsche Boerse/LSE merger and signalled his interest in forming partnerships with other exchanges.
“Large scale transactions take longer than expected and never end as initially planned,” Boujnah said, adding the European Commission’s antitrust view on the deal was not yet known. (Writing by David Wigan)
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