The merger of equals between the London Stock Exchange and Deutsche Borse is likely to conclude irrespective of the prospects of a Brexit scenario, where the United Kingdom could vote to leave the European Union.
After the announcement last week that two of the biggest exchanges in the world are combining their forces into a merger of equals, speculation about the challenges facing the companies has started.
The combined group would result in one of the biggest market infrastructure groups in the world. The strategic rationale for the merger aims to lead to long-term growth and deliver enhanced shareholder value over the long term, however a near-term change in the structure of the European market could pose challenges to this plan.
$450 million of Synergies per Annum
With the companies expecting $450 million of cost synergies per annum, the competitiveness of both companies is likely to increase due to revenue synergies. While from a shareholder perspective Deutsche Borse has been the strongest performer in recent years, the combined global reach of the firms in Europe and Asia could result in a truly competitive entity.
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Looking aside from home markets, the group has been setting foot in Italy, France and Luxembourg among others. Together Deutsche Borse and the London Stock Exchange group will be the largest exchange by total income.
The combination between the businesses of both companies could also result in a more efficient European capital market structure in the long run. Should the competition authorities in Europe approve the deal, changes in the structure of European capital markets would go beyond equities.
Brexit Could Be a Gradual Process of Renegotiation of Existing Treaties
The management of both companies held a press conference highlighting that the companies will proceed with the deal regardless of Brexit prospects. Both companies believe that a merger is positioned well irrespective of the outcome of the referendum.
The outcome of a Brexit vote may result in short term volume gyrations, which in all fairness is not necessarily a negative, since we know that financial intermediaries are usually benefiting from volatility. In addition the ramifications resulting from a prospective vote to leave the European Union are not going to unravel in a single day.
The discussions between the European Union and the United Kingdom could continue for up to two years before a decision is made. The companies will therefore have enough time to adapt to new regulatory framework changes and maneuver with structural shifts of the different businesses of the newly formed group.