Hong Kong’s stock exchange will not find love in London

The audacious bid by Hong Kong’s stock exchange for its London rival is likely to fail — and that is no bad thing.

Hong Kong Exchanges and Clearing’s unexpected US$36.6 billion ($50.3 billion) offer for London Stock Exchange Group would create one of the world’s largest trading hubs. The cash-rich, equities-focused HKEX would gain an edge in fixed-income trading, but in a world where algos and bots handle much of the action, the bidder would do better to take a page from LSE’s playbook and look for bigger data sources.

HKEX calls its plan to create an Asian-European giant that is open 18 hours a day a “vote of confidence in London and the UK’s future role as a global financial centre” at a time that Brexit paralysis is clouding the outlook. The move also shows belief that, despite the recent protests, Hong Kong can still produce worldstage firms.

The more than 300-year-old London exchange has a lot going for it, including fixed-income heft and the FTSE Russell portfolio of index benchmarks used by institutional investors. The offer values LSE shares at 8,361 pence ($141), around 42 times 2019 earnings, according to Citigroup analysts, much higher than the London bourse’s historical average price-toearnings multiple of 22 times.

But HKEX’s offer would scupper LSE’s own bid for data provider Refinitiv, a deal that LSE shareholders like, as shown by its soaring share price. They, and politics, may stand in HKEX’s way. UK regulators will have a tough time accepting the takeover of a British institution by a Hong Kong company. Given the impact to global financial markets and the popularity among exchange-traded funds of the FTSE Russell indices, US regulators may also weigh in.

HKEX CEO Charles Li can argue that his firm is already a global company, having acquired the London Metal Exchange (LME) in 2012, but it remains a foundation stone of Hong Kong. The city’s government owns just 5.9% but appoints the majority of the directors.

Exchange mergers are sensitive propositions anywhere. The LSE has been a frequent target and was in the sights of Germany’s Deutsche Boerse three years ago until Brussels blocked the deal. In the Asia-Pacific region, Singapore Exchange’s 2011 bid for ASX was rejected by Australian regulators on national-interest concerns.

There are also questions over HKEX’s deal-making prowess. HKEX acquired the LME, the world’s biggest venue for trading base metals such as aluminum, at the top of the commodities cycle. It promised LME members that it would have a warehouse in China from which to access the country’s massive metals market. Seven years later and it does not, as Chinese authorities seek to protect homegrown commodities entities, including the Shanghai Futures Exchange and the Dalian Commodities Exchange.

There is no doubt that HKEX needs to diversify. Volumes on the exchange have slumped and it has fallen off its perch as the world’s top IPO venue last year.

Stock exchange businesses reliant on volatile volumes are increasingly passé in a world of computerised trading. With little overlap with LSE, HKEX cannot count on simply cutting costs. The key to growth for exchanges is in the data that fixed-income, currency and equities traders need and the analytical tools that deliver it to them. That is why LSE has pursued Refinitiv.

HKEX has depended on a strategy of being the gateway to China through its stock and bond trading links. The value of that role is diminishing as the country opens direct access to markets, removing quotas on Sept 10 on purchases by global funds.

Wanting to go beyond Hong Kong to create a global powerhouse is understandable. Doing so with another market grappling with its own political crisis and uncertain future post-Brexit is less so. Li likened the Hong Kong exchange’s unsolicited takeover of LSE to a “corporate Romeo and Juliet”.

He missed the point on how that story ended. — E