Shares in the London Stock Exchange (LSE: LSE) have surged by as much as 17% today after the company revealed that it is in merger talks with Germany’s Deutsche Börse.
The London Stock Exchange is no stranger to bid and merger talks, but today’s news has some weight behind it as the exchange has already confirmed that it is already in talks, and has gone so far as to agree a merger structure with its German rival.
According to the press release issued earlier this afternoon the potential merger would be structured as an all-share “merger of equals” under a new holding company. LSE shareholders would be entitled to receive 0.4421 new shares in exchange for each LSE share and Deutsche Börse shareholders would be entitled to receive one new share in exchange for each Deutsche Börse share.
Under the proposed structure, Deutsche Börse shareholders would own 54.4% of the combined company and LSE shareholders would hold 45.6%. The merger press release states that a deal would:
“Offer the prospect of enhanced growth, significant customer benefits including cross-margining between listed and OTC derivatives clearing (subject to regulatory approvals), as well as substantial revenue and cost synergies and increased shareholder value.”
Set on completing a deal
This isn’t the first time the two exchanges have considered merging operations. They first agreed to merge in 2000, but a bid for the LSE (which was later rejected) scuppered the deal. The LSE went on to reject another bid from its German counterpart in January 2005.
Still, it now looks as if the two groups are set on completing a deal. And at a time when markets are becoming increasingly fragmented and regulations are becoming increasingly complex, this merger looks like it could create a lot of value for investors. Combining the two exchanges, which are two of the largest exchanges in the world, would create a clear market leader in Europe, and one of the largest exchanges in the world for trading and risk-managing derivatives.
An industry giant
While City analysts haven’t yet responded to the merger announcement it’s clear that the size of a combined LSE and Deutsche Börse would allow the group to achieve some the best margins in the industry. The enlarged group would also be able to offer services few other providers will be able to match on cost and quality.
Having said all of the above, investors shouldn’t rush to either buy or sell LSE and Deutsche Börse following today’s announcement. There are still regulatory hurdles to jump over and considering the fact that these two exchanges have tried, and failed, to combine so many times in the past should serve as a warning to investors that this isn’t a done deal just yet.