Only Merkel and Schaeuble Can Torpedo LSE and Deutsche Börse Merger

The merger of equals between the London Stock Exchange and Deutsche Börse could hinge on Brexit negotiations.

In the immediate aftermath of the Brexit referendum, one of the first calamities of the outcome, after the British pound situation, was to do with the prospects of a merger deal between the London Stock Exchange and Deutsche Börse. The companies announced their intentions some weeks ago and have been largely dismissive of the prospects of the United Kingdom leaving the European Union.

The management of both firms reiterated on June 24th that the deal is on track and the vote is not going to impact the merger of equals plan in any material way. But with the reality of the tough negotiations which are going to begin between the United Kingdom and the European Union sooner or later, the prospects have turned.

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The main aspect of the deal which is likely to pose risks to the final outcome is the commitment of the management of both firms to circle London as the headquarters of the newly formed entity.

LSE Shareholders Approve, Unlike Local German Lawmakers

While the shareholders of the London Stock Exchange and Deutsche Börse have not expressed any concerns, some local authorities in Frankfurt have started to ring alarm bells. The cost cutting results from the deal have been very tempting for the owners of the companies, but the social costs are angering some politicians.

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Local members of the parliament of Hessen, the German regional unit, where the largest city is Frankfurt, have been vocal against the deal. The local lawmakers are joining Felix Hufeld, the head of the German financial regulatory agency, BaFin. However these concerns are not enough to deter the €25 billion transaction, what matters ultimately is what will top German officials have to say.

German Government, not Shareholders Holding the Key

Both Angela Merkel and Wolfgang Schaeuble have the power to attack the deal as anti-European and anti-competition, but for the time being they are not likely to force their hand. Back in March 2016, the German government was seeing the deal very favorably. The inclusion of Deutsche Börse into the financial capital of Europe was seen as a positive development for the country.

The merger of equals made and still makes sense from a strategic and from a financial perspective contingent on the protection of German business interests. A Bloomberg report back in March stated that the deal has been viewed positively, with the article citing sources close to the government.

With the outcome of the British vote however, the cards on the table have been changed, and in the eyes of the government, the interests of German businesses could suffer. With Britain gearing to become a low corporate tax rates destination, the European Union could yet strike a hard line against its former E.U. counterpart and threaten the still current financial capital of Europe.

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