Daily Management Review

Opposition Brews in the Deutsche Borse – LSE Tie-up


Opposition Brews in the Deutsche Borse – LSE Tie-up
Amid mounting concern about the consequences for the merged entity if Britain votes to leave the European Union, opposition is growing in Germany to Deutsche Borse’s planned $20 billion merger with London Stock Exchange.
"It's a problem if the headquarters of the holding company will be outside the euro zone and, if Brexit happens, outside the EU. The terms are detrimental to the development of Frankfurt as a financial center," said Ulrich Caspar, a member of parliament in the German state of Hesse, where Frankfurt is located.
The deal would create one of the biggest for equities listings and one of the world's largest exchange operators in terms of total income. It was revealed in February. The new entity if formed would also risk manage more derivatives trades than any other such entity in the world.
While 54.4 percent ownership of the combined group would be owned by the shareholders of Deutsche Borse, LSE investors would own the remainder. Deutsche Borse's chief executive Carsten Kengeter would head the merged company and it would be based in London.
Given Frankfurt’s status as home to the European Central Bank and center of the European single currency's settlement, clearing and payments and as a reflection of Deutsche Borse's larger market capitalization, many in Germany want the merged company to be headquartered in Frankfurt instead of London.
The status of London as one of the world's big financial hubs could be lost as a result of the June referendum and if Britain quits the EU which would leave the merged company stranded. This is a fear that has been expressed in Germany.
"The danger for Frankfurt  . . . is that the headquarters for both stock exchanges will no longer be in an international financial center, but in a city whose significance worldwide will be declining," said Clemens Reif, another Hesse lawmaker. He, like Mr Caspar, is a member of Germany's governing Christian Democrats, which are also the ruling party in Hesse.
However this is in disagreement with what some big institutional investors based in London think. Regardless of whether the U.K. remains in or outside the EU, London will remain one of the world's leading financial centers, they say.
"Frankfurt is not going to challenge London as a financial hub. The world's biggest banks, law firms, accountants and trading houses are in London. The company would be better off headquartered in London. The Brexit vote is an irrelevance," said one portfolio manager at a big U.K. institution.
 Regional authorities who will have a big say over whether the deal goes through would be influenced by the issue of Frankfurt's status. The twi up on behalf of Deutsche Borse would be overseen by the state of Hesse's stock exchange regulator.
The regulator could block the proposed merger if it impaired Frankfurt's ability to operate a stock exchange and further develop the business, Hesse's economics ministry had said in February.
It would be "desirable" for the group to be based in Frankfurt, Hesse's prime minister, Volker Bouffier had said last month and added that the regulator needed to establish whether Hesse could continue to supervise the stock exchange if the holding company were headquartered in London.