The LSE must be robust
THE latest assault on the London Stock Exchange (LSE )is about scaling up the Hong Kong model. The freebooting Hong Kong Exchange is about frantic trading, initial public offerings and bringing the huge opportunity of mainland Chinese enterprise to the West.
But there is no way, given the current poor state of Sino-American relations, that Hong Kong buying into New York would be possible.
Making a bid for the outward-looking LSE makes a great deal more sense. This is especially true as overseas trading in the Chinese currency, the renminbi, already has gravitated to London.
So it makes logical sense for Hong Kong exchange, which already owns the London Metal Exchange, to make a £ 32bn opportunistic offer at a moment when sterling is struggling.
The alternate approach is the one being pursued by the new LSE chairman Don Robert and still-unknown chief executive David Schwimmer. The LSE view is that the golden days of exchanges could be over.
More trades are moving onto independent platforms, private equity ownership is on
the rise, and much of the liquidity is soaked up by speculative tech floats such as Uber, Wework and Peloton.
In this new world digital data will be king and the LSE’s path to future growth comes in the shape of the Refinitiv deal which would bring Reuters data and terminals back home to the UK.
Making a choice between these two different visions would be straightforward for LSE investors if there were no politics involved. After all, the basis for the deal is there in the shape of 25pc overlapping institutional shareholdings in the two exchanges.
But there are huge questions given the recent severe rioting in Hong Kong as China reasserts its interests. Holders of supercharged LSE shares might be reluctant to swap them for quoted Hong Kong shares, irrespective of the premium.
Three-quarters of the bid price will be met by shares in the Hong Kong stock exchange. This must be considered politically risky even though the HK currency is reliably fixed against the dollar.
Brexit and the future of the City’s relationship with Europe might make alternative bidders nervous in much the same way as Hong Kong’s current instability might make LSE investors think twice.
Regulators delivered the final blow to Deutsche Bourse last time the LSE was courted, in 2017. The Intercontinental Exchange (ICE), owners of the New York Stock Exchange, pulled out after it became concerned about the impact of Brexit.
Since then ICE has made a bet on data, with the $5bn purchase of Interactive Data Corporation, and is thought to have cooled on acquiring the LSE.
That would seem to diminish prospects of a bidding war unless the Chicago Mercantile Exchange became involved.
The Deutsche Bourse proposal proved poisonous, exposing divisions between the then chief executive Xavier Rolet and chairman Sir Donald Brydon. Both have since moved on to fresh pastures.
The new leadership needs to show unity and determination if it is to send the Hong Kong Exchange chief Charles Li packing. Fighting on DoINg business with Saudi Arabia has become harder as a result of the bombing in Yemen and the Jamal Khashoggi murder.
This makes life tricky for Britain’s biggest engineering and defence group, BAE, which earns 12pc of its income in the gulf kingdom. Uncertainty has still to clear over BAE’s hopes of a £5bn deal to sell Typhoon jets, viewed as critical if Britain is to be seen as a maker of advanced fighters.
It is encouraging that, in spite of the uncertainty over the Typhoon, BAE is pressing ahead with plans for the next generation fighter jet and drones, known as Tempest. It has signed up Sweden as a partner – and now recruited Italy’s defence contractor Leonardo, to work alongside it and engine maker Rolls-Royce.
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