Over the second quarter of 2019 foreign takeovers of London Stock Exchange-listed companies doubled in value to £18.4 billion, with buyers encouraged by weakness in the pound and Brexit uncertainty pushing down valuations. And earlier this week it looked very much like the latest major British public company to be taken over by a foreign buyer could be the London Stock Exchange itself. The company that runs Europe’s biggest stock exchange was subject to a £32 billion approach from its Asian peer – Hong Kong Exchanges and Clearing.
Hong Kong Exchanges made the announcement earlier this week that it planned an £83.61 ‘cash-and-shares’ offer for London Stock Exchange – but only if it withdraws from its planned $27 billion acquisition of financial data company Refinitiv. It sounded like a potentially good offer, given LSE’s share price was sitting at around £67.24 prior to the announcement of interest being made. However, it is now thought there is a significant chance any deal would be blocked by regulators, even if the two stock exchange companies are able to reach agreement on a price. LSE itself also did not react warmly, calling the approach:
“unsolicited, preliminary and highly conditional”.
The biggest objection it is believed regulators would have is that Hong Kong Exchanges and Clearing is partly owned by the Hong Kong government. That would likely lead to concerns over the potential for a key strategic component of western capitalist infrastructure to in turn fall under the influence of Beijing.
Xavier Rolet, a former London Stock Exchange chief executive who is head of CQS, the hedge fund group, commented that he would expect the US Commodity Futures Trading Commission, the US regulator, would have serious reservations about such a deal:
“Ninety per cent of US interest rate swaps are now cleared in London. It feels like a challenging proposition.”
The UK government and Bank of England are also likely to have reservations. LSE operates the wholesale markets’ plumbing and is regarded by the Bank of England as systemically crucial. An entity that combined HKEX and the LSE would also create a global player to rival US exchange groups ICE and CME.
Merging major financial exchanges has historically proven a very difficult task. The most notable recent example of which also involved the LSE. In 2017 a proposed merger with Deutsche Börse, which runs the Frankfurt exchange, was blocked by the European Commission on the grounds that it would have a negative impact on competition across the region, with other smaller local exchanges losing out.
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