BREXIT overvalues merger of Deutsche Börse and London Stock Exchange

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BREXIT is 4 weeks old and the dust has hardly settled, but with a new Prime Minister and Cabinet, we can at least see some stability returning to the Government. However, the task to see BREXIT through, and to try and keep the markets and currency, as stable as possible is a tough one. Only sensible negotiations with the EU, and more importantly the leaders of the major European economies will subside the current choppy waters.

One deal that is almost complete is the merger of Deutsche Börse and the London Stock Exchange. Which is all done bar the shouting, but this was a pre BREXIT agreement. Does the future climate of a merger look any rosier now, or is there doubt about the overall value of this deal?

Certainly from the UK side and London in particular, there is a need to retain an international Stock Exchange and from the London Stock Exchange point of view, the deal with the Deutsche Börse looks a very good one.

From Germanys viewpoint it’s less obvious, as a BREXIT presumably will devalue the value of the LSE and its attraction, especially if the European Parliament is correct, and the UK becomes cut off from the EU.  So if the UK and London in particular, is going to suffer as badly as the EU and most experts believe, does it make sense for Germany to go forward with the deal, at its pre BREXIT offer?

The London Stock Exchange (LSE) business is under attack, with order flows moving seamlessly to other Exchanges and MTFs. Internalisation of order flow, looks a decent proposition to many leading banks under cost pressure, and where regulations are affecting the power of their balance sheet. The whole business of trading securities has moved to a high volume, low margin business. Which is far more attractive to the institutional and private investor, but less attractive to Banks and Stock Exchanges.

A quick look at the P & L of most Stock Exchanges shows that they make plenty of money from ancillary businesses like data, rather than traditional listings and trading. However, even this business will eventually come under greater competition, as alternative platforms hit the markets, reducing further the price of data and hitting their profit margins.

With technology such as Blockchain DLT, it looks more and more likely that the move away from centralisation will continue to gather pace, thereby putting more pressure on traditional Stock Exchanges.

Although, it looks to me like the deal for the LSE is a good one, given the price but the Deutsche Börse will be taking on a business that as it stands looks as though it will have its fair share of challenges in the not too distant future.

 

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