LSE sounds the retreat
THE attempt by Deutsche Boerse to swallow the London Stock Exchange in a £21bn ‘merger of equals’ should have been doomed from the day it was announced.
The possibility that Britain would vote to leave the European Union always meant Frankfurt would be very unhappy the headquarters of the enlarged exchange would be in London. Moreover, cost savings from the merger were always marginal, especially when it became obvious that clearing operations, one of the biggest generators of income, would remain on respective home turfs.
This deal always had the appearance of having been cooked up by investment bankers, advisers and executives for their own benefit. LSE chief executive Xavier Rolet may have done a brilliant job in increasing the market value of the LSE but was also known to be looking for an exit. The Wimbledon-based German boss of Deutsche Boerse was seeking an easier commute and more power. Judging from his odd pattern of share purchases ahead of the deal, the money was attractive too.
So what scuppered the transaction? It would have been nice to think it was the rejection of the deal by the Government or UK regulators. But throughout the process we barely heard a word of protest over the possibility that one of the great pillars of the City was about to be sold. If ever there was a dereliction of duty, it was this.
At least EU politicians spoke up, with both Paris and Frankfurt laying out their reservations. If there was a worry in London it was about the financial stability implications of the deal. But in true British fashion, these were whispers rather than shouts. The truth is that the new exchange looked as if it would be grossly undercapitalised for the levels of clearing which the exchanges have taken on now that the investment banks are out of over-the-counter activities.
The surprise about the pull back from the merger is that it was the Italian fixedincome platform MTS which was at the core of the decision by the EU Competition Commissioner. Throughout the process, MTS has barely been mentioned. Nevertheless, as Europe’s most important fixedincome platform, handling €100bn of transactions each day, it was hugely important.
It may be too early to celebrate the continued independence of the LSE, although the tone of its language suggests the German game is all but up. What this whole episode demonstrates is that even with the most expensive advice in the world, deals can go horribly wrong. Huge amounts of money have been wasted.
Shareholders should be angry at the misjudgements which led management down this path and the future leadership of both chairman Donald Brydon and Rolet hang by a thread. The big question is, will the ruthless Atlanta- based Intercontinental Exchange, owner of the New York Stock Exchange, make a fresh pass? ICE would offer an unwelcome challenge. But in contrast to Deutsche Boerse it at least understands how free-market capitalism works and would not stifle London’s innovation. Save our Marmite JUST a week has passed since Unilever gave would be predator Kraft Heinz and its backers the heave-ho. In the aftermath Unilever chief executive Paul Polman and his board promised a hurried review of operations to be finished by April. That has led to all kinds of speculation of a break-up of the group or splits in the manner of ICI back in the early 1990s. Any such radical changes should be resisted as strongly as Kraft Heinz.
The whole beauty of a diversified consumer products company such as Unilever is that if one part of the business is sub-performing another will fill the vacuum. Sure, there is always room for some tidying up. It is time to unwind the complex Anglo-Dutch shareholding structure and bring the group under one transparent ownership.
There may also a case for selling of some of the UK domestic brands such as Marmite and focusing on those appealing in emerging markets. We should never forget the quirky tastes of some of our trading partners. Horlicks, one of GlaxoSmithKline’s less heralded brands, is a best-seller in India.
So even Marmite and PG Tips may be big, little earners. Audit lessons HARD to feel sympathy for PwC after the Oscar-night fiasco. Hollywood and a worldwide audience have gained some insight into the auditing skills which brought us Tesco’s accounting fraud, the audit of Sir Philip Green’s private empire and the recent accounting snafu at BT’s Italian offshoot. And we used to think accountants were safe and boring.