Xavier Rolet, left, the chief executive of the LSE, and Tom Kloet, the chief executive of the TMX Group. Reuters
Xavier Rolet, left, the chief executive of the LSE, and Tom Kloet, the chief executive of the TMX Group. Reuters

Not much stock held in London exchange merger



By fortunate coincidence, I was having lunch with a senior stock exchange executive in Dubai the day the news broke of the deal between the London Stock Exchange (LSE) and TMX of Canada.

As we looked at the splash headline in the Financial Times, he just shook his head and said: "This just doesn't look right." I had to agree.

There is something deeply unsatisfying about the deal between London and Toronto to create a US$7 billion (Dh25.71bn) stock market.

This cannot be the big strategic move the LSE has been pondering for years. While some reports talked about the creation of a global stock exchange, it is far from that. In fact, the deal creates a middle-ranking Anglo-Canadian market with a heavy reliance on mining and natural resources.

As if to highlight the mediocrity of the LSE's ambitions, later that same day came a truly strategic move: the potential tie-up between NYSE Euronext and Deutsche Boerse that spans two thirds of the world and links the biggest markets in two of the three most important time zones.

Now that's a global stock exchange. In comparison, LSE-TMX is a poor relation; the Commonwealth Games compared with the Olympics.

Maybe the LSE's comparatively new chief executive Xavier Rolet has something astounding up his sleeve (a deal with Hong Kong Exchanges and Clearing, the world's biggest market and the gateway to Asia?) but there is nothing in the corporate DNA of the London exchange to suggest such a visionary move is imminent.

The LSE under Mr Rolet's predecessor Dame Clara Furse spent the first decade of the millennium declining offers from suitors who really would have made London part of a global strategic market.

American, German and Australian partners paraded themselves in front of Dame Clara who told them all, "thanks, but no thanks."

Meanwhile, changes were taking place in the industry that chipped away at the value of the old-fashioned metropolitan exchanges. New products and trading platforms, as well as settlement and clearing technology, made traditional exchanges look increasingly like monopolistic and costly dinosaurs.

Share trading migrated away from the old exchanges to new cybermarkets with bizarre names such as Chi-X and Bats. It was a threat London seemed incapable of countering.

The financial crisis, which hammered equity values everywhere, understandably further distracted the LSE from a strategic response.

I am not saying the LSE is doomed to extinction, nor that the Canadian deal is without value. The new exchange will be home to about 6,700 companies, the largest number on any market in the world.

But many are small-to-medium mining and natural resources companies. These stocks are vulnerable to the cyclical nature of commodity prices and, as Nasdaq found to its cost during the dotcom bust in 2000, it's not sensible to put all of your eggs in one basket.

And does it make financial sense? Are there "synergies" (as the mergers and acquisitions experts say) from the merger?

My lunch guest that day summed up the doubts: "Saving on costs is easy in this kind of scenario but growing revenue is more difficult. I don't see where that will come from."

Globalisation considerations apart, the manoeuvrings of two middle-ranking exchanges on the other side of the world would be of little relevance to the Gulf were it not for the fact that both the UAE and Qatar have the most tangible of reasons to be interested: cash.

The summer of 2007, in those halcyon days when the credit crisis was just a small whisp of cloud on the far horizon, global exchanges played a version of "pass the parcel" with equity stakes in each other. Americans, Scandinavians, Germans, Emiratis, Qataris and British were caught up in a whirlwind of merger speculation.

When the music stopped, the Americans had snapped up a big chunk of the European business with deals or mergers involving the two big New York outfits, Nasdaq and NYSE. Dubai was left with a strategic alliance with Nasdaq (which has since mutated into the Nasdaq Dubai market) and a big parcel of shares in the LSE.

A quick glance at the LSE share price chart shows this has not been a financially rewarding experience for Dubai (nor for Qatar, which also bought in near the top of the 2007 bubble). Calculations suggest Dubai is sitting on a loss of about £500 million (Dh2.94bn) on its original investment in the LSE, estimated to have cost about £1.5bn.

Against that background, the short-term gain in Dubai's value on the day the Canada deal was announced (about £20m), although welcome, is trivial.

Borse Dubai, the government entity that holds the 20 per cent stake in LSE, came out with a ritual statement welcoming the LSE-TMX deal as a positive factor on the share price.

But in the longer term it will have to weigh the negative factor of decreased influence in the new company, where while remaining the biggest shareholder, it will have only about 11.5 per cent of the total.

In the summer of 2007, Dubai looked to be at the centre of a new wave of global market consolidation. Now, it is going to be a minority partner in an Anglo-Canadian joint venture that still needs the approval of the fractious Canadian authorities.

It seems to me that big opportunities have been lost, in London and Dubai.

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