It was meant to bring together London, Europe’s leading financial hub, with Frankfurt, the home of the European Central Bank, to create a behemoth able to trade in equities and futures, and supply benchmarks, index and data analytics. When it was first announced in February, both sides were publicly dismissive of the impact of a British vote to leave the EU — and it appears seems the deal terms were designed with similar insouciance. These terms cannot now be changed — making the likelihood of the deal closing vanishingly small, despite reassuring utterances by both companies to the contrary.
It is not unusual for the architects of a deal to become so fixated on getting it done that they fail to focus on what might derail it. Mergers and acquisitions history is littered with the corpses of overconfident companies that were unable to get their deals from the drawing board to the board room. Nor are Deutsche Börse and the LSE the only members of the business community to have underestimated and underprepared for a Brexit. A lack of contingency planning as well as a fastidious refusal to dirty their hands in the political debate have left many other businesses scrambling to react to the vote. A survey of corporate clients by one big advisory group on Friday found that a staggering four-fifths had neither a Brexit response committee set up, nor a specific plan for what to do if the outcome was for Leave.
This complacency is shocking. But more so at Deutsche Börse and the LSE. When the deal was unveiled, advisers to both were keen to suggest that their timing was cunning. This bid, they said, had been deliberately launched amid the political uncertainty in the run-up to the referendum to “steal a march on US rivals”. They said the risk of Brexit “provided the camouflage” under which the deal terms were finalised. Quite how clever that was is now moot.
Last Friday, both companies were putting a reassuring gloss on the news of the referendum’s result. They were committed, according to their joint statement, to the deal’s agreed and binding terms, irrespective of the vote, and the outcome did not affect its “compelling strategic rationale”.
Behind the scenes, though, it was a different story, with senior managers at the LSE privately acknowledging that the deal would be the first corporate casualty of the vote.
There was good reason for their gloom: those “agreed and binding terms”. Because they cannot be tinkered with, and because they state that the combined companies’ headquarters will be in London, they make the deal highly unlikely to close. German regulators — not to mention politicians — were already queasy at the prospect of a London HQ, and are even more likely to put their foot down now given that, after a Brexit, London’s financial activities will not be overseen by Europe.
Putting the HQ of the merged company in a city no longer able to trade freely with the bloc also reduces the financial logic of the deal — as does the sharp fall in sterling since Friday.
A particular spanner in the works is likely to be the European Central Bank’s demand that the future clearing of euro-denominated derivatives transactions takes place inside the EU. That would entail routing trades through a city such as Paris or Frankfurt, rather than London.
All these consequences to a Brexit vote were foreseeable at the time the deal was announced and its terms were designed. But this was a pet project of Xavier Rolet, the chief executive of the LSE and it provided a dramatic start to Carsten Kengeter’s new job as chief executive of Deutsche Börse. Such considerations, it appears, trumped any proper evaluation of the risks.
Millions of pounds will already have been spent on lawyers, PR executives and other advisers to this deal, as well as thousands of management hours. Messrs Kengeter and Rolet are unlikely to take personal responsibility for the deal falling through, rather as the UK’s political leaders have brushed off their share of the blame for last week’s referendum outcome. Joachim Faber, Deutsche Börse’s supervisory board chairman, will now lead a six-person referendum committee drawn from the boards of both companies to “work through the challenges” the Brexit vote has posed.
This will be a further waste of time and shareholders’ money for a deal that no longer makes sense.
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