The announcement of a merger between Deutsche Boerse and the London Stock Exchange, among political talks about Brexit (the possible exit of Britain from the European Union) proves, in case of need, how much European politicians are removed from the real financial world. The City of London needs the Eurozone and the Eurozone needs the City.
Frankfurt and London merger is a mega-transaction
The market capitalization of the two entities combines would reach € 30-billion, creating an essential platform for competition between Europe and the rest of the world. It's the size of Hong Kong Exchanges. London will undoubtedly continue to be the heart of the European stock exchange. Frankfurt will dominate the derivatives market, facing its biggest competitor the Chicago Mercantile Exchange.
For Deutsche Boerse, it is the third attempt to expand internationally: it failed against French interest the first time, it failed against the unreasonable European Commission the second time. Will this be the third and right one?
The marginalization of Euronext
The Euronext project has at least subsisted. With a market capitalization representing 10 percent of LSE-Deutsche Boerse, and without a derivative market, this merger represents a strategic challenge.
"If you cannot bet them join them": will Euronext choose to join the new platform? It seems to be the only viable solution to remain in the game for Amsterdam, Paris, Brussels and Lisbon who compose Euronext.
The French establishment refused a balanced merger with Deutsche Boerse to go to the US. Once NYSE was bought by ICE, the derivatives products activities (previously Matif and Liffe) stayed in ICE. Euronext is now four cash markets.
Europe cannot reject this merger
The structure of LSE and Deutsche Boerse is different. 80 percent of Deutsche Boerse income is made of derivative products and after trade services while LSE is the largest in European stock cash trading.
This announcement rebuilds hope of a true European leadership in stock markets. It is time to open widely our eyes and not to be misled by politics that are weakening Europe. It requires a pan-European vision that has often been missing in Brussels. A refusal would make Brexit inevitable.
Technically, the objections of the European Commission on the previous Deutsche Boerse attempt are no longer valid since the other European derivatives markets are owned by the International Commodity Exchange (ICE). Lord Hill, the British Commissioner for financial stability, made it clear that Brexit risks ruling Europe out of its best market.
Will the ICE counter Deutsche Boerse's proposal for London?
While there is always a possibility that a bidding war will be initiated by the ICE who announced its intention to make an offer, it is also time to look at the strategic dimension.
While perfectly understandable from a defensive standpoint, an ICE bid for yet another cash market would certainly raise questions on the intentions of the Atlanta-based exchange to develop itself in a segment of the capital markets that is notoriously low-margin and commoditized.
The planned merger would create 300 million euros of savings that the ICE bid could not generate since it is not a European cash market operator. The announcement of the terms shows a very substantial strategic vision.
The symbolic challenge: the Atlantic question
London is, once again, in the middle of the Ocean, closer to Germany but not far away from the United States. In a sense, this transaction is a miniature exercise between the USA and Europe, the decision the United Kingdom does not want to arbitrate, being benefitting from both sides. LSE is as much torn apart as the whole country, about Brexit.
The next weeks will answer the question of LSE and the next few months the question of Brexit. The consequences of those choices will redefine the European landscape. I truly hope that, for once, the European vision will prevail.