Guest article by John Colley
of Warwick Business School, a Professor of Practice, a former MD of a FTSE 100 company and researcher of large mergers and takeovers
Stock exchange boards in Frankfurt and London have announced the awaited almost €30 Bn 'merger of equals' with Deutsche Borse shareholders taking 54% of the shares and paying a premium for control. The benefits are being aired as €450M of administration savings, mainly IT, and 'capital compression' of €9Bn for investors as the same capital requirement would satisfy both exchanges. The Head Office will be in London. The new exchanges powerhouse will have almost 10,000 employees and will list around 3200 companies with market capitalisation of €7.1 Trillion. In the context of these figures the savings do seem rather meagre in a merger which appears to be designed to avoid upsetting staff, directors and, indeed, competition authorities.
The real issue is achieving scale to compete on a global scale against already consolidated opponents. Europe needs a strong champion to compete against the US exchanges and Hong Kong. However competition authorities remain to be convinced of this argument. In the past European competition authorities have tended to see such mergers at a European level. The issue this time may also be the unwanted complications of a possible Brexit. Both businesses will have to convince their shareholders that the union will be effective in both scenarios of exit and remaining.
Whilst promoted as a 'merger of equals', with top jobs respectively filled by a balance of directors from both businesses, in practice such arrangements rarely work. The Chairman and Finance Director are from the LSE whilst the deputy chairman and chief executive are from Deutsche Borse. The large board of 16 will consist of 8 directors from each business. Large boards are often unworkable particularly when difficult decisions are needed to implement substantial cost savings. Apparently redundancies are to be allocated equally between London and Frankfurt. Doubts are already gathering that the cost savings will be made as is frequently the case with acquisitions. Shareholders are predominantly US based and will want to see more decisive management. This increases the prospect of Intercontinental Finance Exchange making a successful bid.
'Mergers of equals' usually result in a lack of clarity in direction and leadership as both camps jockey for influence. A result is a confused structure and a failure to drive cost savings and revenue opportunities arising from the merger. This situation can often persist for some time before investor pressure results in one camp taking overall responsibility and addressing the necessary savings. However this deal may well not be quite as the financial PR suggests as there are a number of interests to satisfy. In reality it may well be a German takeover which has to be framed as a 'merger of equals' to avoid reaction to any potential weakening of the UK in the global financial sector. The Government will be very sensitive to the transfer of activities to Frankfurt.
There is also the sensitivity of Staff based in both Frankfurt and London who will not want to hear of substantial savings which inevitably will be borne by personnel. A rapid exodus of the best talent could ensue before integration proceeds.
Famous 'mergers of equals' include the Daimler - Chrysler acquisition which suffered from a lack of clarity in leadership and eventually resulted in the disposal of Chrysler for a fraction of the original price. Another more recent example is the merger of cement Heavyweights Lafarge with Holcim which was similarly billed and involved a sharing of the top jobs. Poor performance has resulted and a lack of merger benefits. The clash of strong German and French cultures has not helped. As the consequence of 'mergers of equals' the existing management teams continue to exist with no clear dominant force to drive benefits and direction.
The proposed all shares merger opens the way for bids from the USA. Clearly it is now or never for ambitious exchanges seeking growth. The industry is consolidating and exchanges will want the benefits of scale and scope relative to their competitors. Currently the intervention is likely to come from the US network of exchanges and clearing houses 'Intercontinental Exchange' led by founder and president Jeffrey Sprecher. However the current approach of the LSE and Deutsche Borse may not be aggressive enough to see off Sprecher's unwanted attention. The prospect undoubtedly exists for a more attractive bid with a cash element and this could be justified through higher cost savings. Intercontinental, based in Atlanta, was founded in 2000 compared to the illustrious history of LSE founded in 1571 and opened by Queen Elizabeth.