Oscar Wilde once wrote that there are two tragedies in life: “One is not getting what one wants, and the other is getting it.” London investment bankers know just what he meant.
When Deutsche Börse sought to merge with the London Stock Exchange in 2000, big banks cheered, hoping for lower costs and higher volume. After the smaller firms that held a big stake in the LSE scuttled the deal, the big banks convinced it and other exchanges to demutualize to facilitate mergers. The German and British markets, along with Paris-based Euronext, have since raised fees to boost shareholder returns. So last month, when Deutsche Börse CEO Werner Seifert proposed a £1.3 billion ($2.5 billion) takeover of the LSE, those same banks feared that the merger would only send fees higher.
“We’d prefer there was no deal,” says a senior executive at a big U.S. investment bank. “What we’ve seen is extremely monopolistic behavior on the part of all exchanges. They’re getting economies of scale and giving nothing back to us.”
Postdemutualization, however, investment banks have no voting power to protect their interests. Instead they’ll lobby regulators to influence any merger. One major concern: that clearing and settlement for a merged exchange be handled separately from trade execution. Deutsche Börse’s structure integrates its own clearing subsidiary, Clearstream, with the exchange, an arrangement bankers say impedes competition and inflates costs. (Clearstream generates a quarter of Deutsche Börse’s profits.)
Seifert, a former McKinsey consultant not known for diplomacy, has turned on the charm in an attempt to win over the LSE, which rejected his initial bid but agreed to talk further. The 55-year-old executive promised to let LSE users keep existing relationships with Clearstream competitors LCH.Clearnet and Crestco. And he’s wooing senior LSE executives, led by CEO Clara Furse, by offering top jobs commensurate with London’s 45 percent share of equities trading at the two exchanges.
Still, many bankers are rooting for Seifert’s rival, Euronext CEO Jean-François Théodore, who met with LSE execs last month after Seifert’s overture and is expected to make a competing bid. Euronext’s successful integration of London futures market Liffe and its relative flexibility on fees have won Théodore plenty of goodwill. “Jean-François is a master at relationships, at bringing people together,” the U.S. banker says.
But economics likely will trump personal connections. LSE shares rose to 580 pence late last month, above Seifert’s offer of 530p and a more than 40 percent jump from November. At such a rich price, the winning bidder, whether Seifert or Théodore, will most likely be looking to push fees up, not down.