Xavier Rolet, the CEO of the London Stock Exchange, is rather like the Duke of Wellington who, when asked his strategy on the morning of the Battle of Waterloo, said: “If I thought that my hair knew what my brain was thinking, I would cut it off and wear a wig.”
Right now, Rolet is racking his brains out trying to figure out ways of rescuing the LSE’s £24bn merger with Germany’s Deutsche Borse. He doesn’t have long; Brussels is to rule on the deal by the end of the month. And at the last sighting, the Frenchman still has his hair. From what I hear on the battleground, he may be close to pulling it off.
So what’s going on? Only two weeks or so ago the deal was dead. What’s more, Rolet was the one wielding the axe by refusing a last-minute request from Brussels to sell off the LSE’s Italian bond trading platform, MTS, to ease fears over competition.
Although it was the European Commission that made the request, it’s now clear the demand came from Euronext (the French exchange) because of competition concerns over clearing operations. Although the LSE has already agreed to sell the French part of its clearing arm LCH SA – to Euronext – the French decided they wanted more meat. It is they who lobbied Brussels to demand the LSE sell MTS because they fear that clearing could be redirected back into combined LSE-DB group. Still with me?
As the MTS platform is one of the biggest in Europe, it’s fair play that Euronext doesn’t want all the clearing business to stay with the LSE-DB group. You can see the logic of that. And you can also see why the LSE told Brussels to stuff it, refusing to sell.
But there’s something distinctly fishy about this scenario. It’s difficult to believe that neither Euronext nor the European Commission – or Rolet or his advisers – had not thought about the MTS issue before.
So was MTS a red herring? Was it used as a fig-leaf by Rolet to play hard-ball with the Germans – particularly Frankfurt’s Prussian politicians demanding their own HQ – to get them more firmly on side?
Make no mistake, Rolet wants this deal done; it’s his legacy before driving off to his Chene Bleu vineyards to decide whether or not to dip into the murky world of French politics, albeit a doddle compared with the politics of exchanges.
He’s also right to argue the merger makes huge commercial sense – for the Brits as well as the Germans – as it would create a giant European-based financial powerhouse capable of taking on America’s ICE and CME exchanges as well as the big beasts in Bejing and Hong Kong.
Together, London and Frankfurt would be the world’s largest exchange by total income, the biggest for equities listings and would control more derivatives trades than any other entity in the world. Around a third of the LSE’s revenue now comes from capital markets; the rest is made from the post-trade services, technology and information business so integral to 24/7 international electronic trading. Most capital raising – whether its on the primary or secondary markets – is now global and crosses borders. Even AIM, the country’s small growth market, is a magnet for international companies.
Yet the deal’s critics, who are hoping the Rolet will fail, have a point too. It’s an emotional one as well as political because stock exchanges are not normal corporates. They are quasi-monopolistic creatures which, like national flags and Beefeaters or in Frankfurt’s case, bierkellers and frankfurters, are an atavistic part of a nation’s fabric.
Which is why the politicians in DB’s home state of Hesse are demanding a Frankfurt HQ, even though the pre-nuptial signed by them is for a German CEO (who lives in Wimbledon anyway) of the new company in return for the London HQ.
Maybe that’s what Rolet was trying to settle with his latest tactics? Push them to the line? If the deal were to go through now, German politicians would be either insane or foolish to object to the legally drawn up protocol that requires 75% approval by shareholders.
Maybe that’s what Rolet was trying to achieve with his delaying tactics. Push the Germans to the line? For German politicians were stirring up trouble by demanding changes to the deal even though the two exchanges had signed water-tight agreements requiring that changes to the status quo – like where the top holding company or the HQ is to be -had to be approved by 75% of the shareholders. But if the deal were to go through now, and the Germans are still objecting, they would look foolish or untrustworthy, or both.
Counterintuitively and not a little ironically, getting this deal signed off harmoniously would be great for future EU relations just as we are about to go into Brexit negotiations.
But what happens if Rolet isn’t victorious? What do the LSE and indeed Rolet, who had promised to step down after the merger goes through, go for next? And will there be an bloody coup as shareholders are said to be understandably twitchy that Rolet and his chairman, Donald Brydon, have wasted time and money on the deal ?
First off, the LSE should become more of a predator. The shares are strong and there’s cash in the coffers so doing new partnerships and deals is a no-brainer. It should keep going global with more partnerships like those with Shanghai and take a leaf from ICE and CME to find out how they use new technologies so well.
Then there are the home-grown routes that Rolet has highlighted: building up CurveGlobal into listed futures exchange to rival DB’s Eurex and make up for the tragic loss of Liffe, now part of Euronext, and take on DB’s Clearstream in global collateral management.
And the deals? Well, an obvious “all-British” solution would be bidding for Michael Spencer’s £2bn plus Nex Group, the electronic and post-trading arm of Icap he runs over after selling his voice broker to Tullett Prebon, creating TP Icap.
There is history and logic too; don’t forget Icap and the LSE held takeover talks about a decade ago. Who knows, Spencer, who turned a tiny voice broker into a global multi-billion pound empire, could parachute into the LSE hot seat if Rolet doesn’t make it to Waterloo. Stranger things have happened.