London Stock Exchange – Deutsche Börse Merger, and Brexit

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

More details were announced this morning of the proposed merger between the London Stock Exchange (LSE) and Deutsche Börse. Is this really a “merger of equals”, as it is being promoted, because such things are very rare in practice?

Deutsche Börse has a larger market capitalisation and their shareholders will end up with 54.4% of the combined group. We now learn the group will be domiciled in London but will have headquarters in both London and Frankfurt with listings on both the London and Frankfurt stock exchanges. Can a company really maintain two headquarters? Although the new Chairman will be from the British business, the new CEO will be Carsten Kengeter from the German company.

So far as users of the London Stock Exchange are concerned, such a merger would be unlikely to have any short term impact. But one would hope that the change of management might see a revolution in due course in the operation of the LSE’s AIM market which has developed a very poor reputation as a result of listing many poor quality companies and having poor regulation. Perhaps the introduction of some Germanic discipline into that market as opposed to the “anything goes” approach of the LSE might improve matters?

So far as investors in the LSE are concerned, this is probably an attractive offer as it makes the combined group even more dominant in Europe’s financial markets than before. Nick Train said at the recent Finsbury Growth & Income Invesment Trust Annual General Meeting that he likes the LSE because it is an effective monopoly. And he is surely right there because all exchanges tend to become natural monopolies as those with the greater transaction volumes and liquidity end up growing in size against any interlopers.

This mornings announcement recognises that “a decision by the United Kingdom electorate to leave the European Union would put the project at risk”, so they have formed a “Referendum Committee” to make recommendations on the ramifications of such a decision. But they believe it makes strategic sense regardless and would not be a condition for the merger.

In the meantime David Cameron has been lining up the big guns to support staying in the EU. A letter has been signed by 36 FTSE-100 companies, or their directors, and 162 other companies to the Times opposing Brexit. That included companies such as BAE Systems, Shell, Asda, Marks & Spencer, Vodafone and EasyJet. But other retailers such as Tesco and Sainsbury have declined to sign, perhaps from the risk of offending their customers. The spirit of the Conservative heartlands is probably best reflected in a vote taken by Councillors in the London Borough of Bromley (the writer’s home borough of course). The result was 23 votes to 7 to leave the EU. Councillor Fawthrop said “This is the first Conservative council to pass such a motion. It is a message to the people in this borough and the country as a whole that we should not take it for granted that the establishment is in favour of staying in the EU”.

ShareSoc conducted its own survey of our Members on Brexit which we reported on earlier. But the latest indication from stock market investors of how they might vote is the results of a survey of the customers of The Share Centre published today. The Share Centre are one of the largest retail stockbrokers. They report that 63% of personal investors would vote to leave the EU. As in the ShareSoc survey, most respondents did not think the deal negotiated by David Cameron goes far enough. It is becoming clear that the Referendum vote will be a hard fought contest particularly with Boris Johnson coming out in favour of Brexit. But the betting is still on a vote to stay in and where political votes are concerned, the gambling odds are often a good predictor. Stock market investors are not necessarily of course a good predictor of the mood of the public at large, even if they might be more informed than most on financial matters.

Roger Lawson

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