Big Apple could make small potatoes of London and Toronto’s big exchange
US-German deal and swing to Asia could dwarf LSE-TMX merger.
It is fair to say that the thunder was somewhat stolen from the London Stock Exchange (LSE) earlier this month when, the day after it announced that it planned to merge with Toronto’s TMX exchange, a slightly larger deal loomed into view.
While the LSE-TMX tie-up will create an entity with 6,700 listed companies worth around £3.7tr, it is likely to be dwarfed by the behemoth that would be forged if the proposed merger between New York’s NYSE Euronext and Frankfurt’s Deutsche Börse goes ahead. The US exchange on its own has around £10tr worth of listed assets.
Consolidation of exchanges is nothing new, but the recent level of activity is indicative of the increasing globalisation of the capital markets, and for some a sign that a recovery could be in the offing.
But while the LSE combination with its Canadian counterpart was widely portrayed as a defensive move, it still might not be enough to see it maintain its place as a major global exchange, despite the obvious pull of the City.
“For the City there are risks in all this in that it could become a marginal player,” warns Tim Stocks, the head of financial institutions and markets at Taylor Wessing.
The LSE rejected an attempted merger with Deutsche Börse a decade ago and fended off a subsequent takeover bid in 2005, but the increased consolidation of exchanges that has occurred since that time means such protectionism has quickly become to seem anachronistic.
“It was considered to be a victory when [the LSE] fought them off,” continues Stocks. “Now it might come to be viewed as an opportunity missed.”
However, even if the City as a whole is playing catch-up, the news might not be so bad for its lawyers, especially those backed by firms with globally minded capital markets practices.
As Stocks explains: “For lawyers it’s got to be a good thing. You’re getting to a situation where liquidity is likely to improve as you move towards [having] global exchanges. A cash surplus in Asia could now be redeployed by a corporate in the West.
“It could lead to more volume of transactions, which is a good thing for lawyers.”
The deals have already been good news for the firms involved in the mergers. Linklaters and Wachtell Lipton Rosen & Katz took the mandates for Deutsche Börse and NYSE Euronext respectively, with Cleary Gottlieb Steen & Hamilton advising the US exchange on the competition front.
The magic circle feeding frenzy continues with the Anglo-Canadian deal, with Allen & Overy and Freshfields Bruckhaus Deringer acting respectively for the TMX and the LSE.
The US-German merger, however, is far from a done deal. Although sources say both sides are confident of getting it through, regulators on either side of the Atlantic might take a different view, particularly given that it will mark the first time that the European Commission has taken a look at a combination between stock exchanges.
“It’s likely they’ll get a reasonably careful review [from the Commission],” admits a source familiar with the situation. “These deals are a lot more complicated than a cement or chemicals merger.”
For some, regardless of when the current deals get the green light, the real game-changer is yet to come. And it is to the East that those heads are turning.
Hong Kong listings have been increasingly in vogue over the past couple of years, as evidenced by Rusal’s $2.6bn (£1.61bn) IPO early last year. That deal has particular resonance for the shifting centre of gravity among the exchanges, coming after an attempted 2007 flotation by the Russian conglomerate failed to get away.
Nearer home, Poland’s state-owned Warsaw Stock Exchange (WSE) has also been muscling in on the scene of late. Power company Tauron’s $1.3bn listing last year was one of the largest in the bourse’s history and came around the same time as it secured a strategic alliance with NYSE Euronext.
Norton Rose won the mandate for Tauron, with Mark Lloyd Williams, a corporate finance partner at the firm, saying such consolidation is a symptom of an increasingly well-worn tale, namely globalisation of the capital markets.
“Clearly, one of the things we’ve been seeing is the increasing arbitrage between exchanges,” he continues. “We’re seeing quite a lot of companies, particularly in the oil and gas and mining sectors, looking to get a dual listing.
“It shows that the capital markets are truly global, so people will expect a single firm to be a one-stop shop.”
In a sign that some firms may be worried that this brave new world could leave them stranded, this year has already seen Reed Smith and Travers Smith recruit their first London-based US securities partners.
But the US is only one part of the global picture, and it is the prospect of consolidation in Asia that will once again change the landscape.
Australia has rejected an advance from the Singapore exchange already this year, but the market is still holding its breath as it waits for the first major combination in that part of the world.
Dual listings could be here to stay, which may seem like a positive note for the LSE and the advisers who feed off it. But if the bigger global tie-ups increasingly leave London out in the cold, then the UK might end up in the second division.
It is a development that those firms with global aspirations are watching closely.
As Stocks at Taylor Wessing puts it: “Outside of watching the FA Cup, it’s the best spectator sport out there at the moment.”
