Article / 18 March 2016 at 11:00 GMT

What Germany doesn't want from the LSE merger

  • Merger of Deutsche Börse and LSE will create the globe's largest stock exchange
  • Shareholders of Deutsche Börse will hold the majority
  • Cost savings are estimated at almost EUR500 million/year
  • Germany fears losing out
  • Brexit fear could legislate against locating the HQ in London 
London
 When it comes to skyline, London... Photo: iStock

By Clemens Bomsdorf

It's not just the influence of German politicians (read: Angela Merkel) that is weakening within Europe. Germany's financial centre (read: Frankfurt) also risks losing power. At least that is the hushed chatter doing the rounds in  Germany's corridors of power 

They fear that the planned merger between the local stock exchange (see here for our MustRead on this), Deutsche Börse, and its UK counterpart, the LSE, has the potential to weaken Frankfurt and hence Germany as a financial hotspot. Just last week, Friedrich von Metzler underlined that he would like to see a pan-European exchange located in Germany, not the UK. Metzler used to be the head of the board Deutsche Börse and is one of the leading owners of his family’s Frankfurt- based private bank Metzler.

No sellout

Deutsche Börse CEO Carsten Kengeter will have to allay the concerns of Metzler and keep shareholders onside a €450 million/year cost-saving platter to “convince the German establishment that shifting the power base of a combined group from Frankfurt to London is not a sellout of Germany’s financial centre. That means taking politicians, influential unions and worker representatives with him,” as the Financial Times’ Financial Editor Patrick Jenkins puts it.

Jenkins does not seem to agree that Frankfurt’s role is at risk, but he is running against quite a powerful consensus in Germany with even those who generally favour mergers and internationally integrated companies and markets raising concerns.

The argument really centres over whether Jenkins is right or if the naysayers are better armed.

Frankfurt
 ...and Frankfurt do not differ that much. Photo: iStock

Frankfurt has of course taken a hammering from Deutsche Bank's recent travails and would not want to weaken further.

The rare appearance of an exclamation mark in the headline of Germany’s leading conservative daily Frankfurter Allgemeine Zeitung — “Keine Außenstelle Londons!” — says it all: “We are afraid of Frankfurt becoming only an outpost of the London Stock Exchange and we urge everybody who has the power to stop this being so!” That more or less is a longer version in English of the FAZ headline, widely read by business leaders and policymakers.

LSE may have the run on its German counterpart in terms of confidence, but Deutsche Börse is the more important one, not least because it also runs Europe’s largest futures exchange, FAZ argues.

Daniel Mohr, who wrote the commentary, is in favour of the merger, but would prefer the headquarters remain in Frankfurt, where the European Central Bank is located. But if it has to move, why not choose Amsterdam, which is exactly in between the two financial capitals and already is a hub for holdings, he argues.


For the merged group, there is one strong argument in favour of locating the holding in London. Employees would not automatically be guaranteed the right to be represented on the board if the corporation were to be registered in London and German companies have actually benefitted from this model. 

German authorities may also have a role to play as they have to give the merger the green light and may point towards Deutsche Börse's size relative to LSE as reason for keeping the HQ "at home".

There is still one unknown and important factor: the potential Brexit. If the UK leaves the European Union, which many business leaders really do not want, a merged stock exchange with a HQ in London would suddenly be on the periphery.

That might harm all market participants, not only Frankfurt and Germany. Little wonder then that Metzler cites Brexit as an argument in favour of Frankfurt. 

exch
 Does it really matter where an exchange has its HQ? Photo: iStock

The Daily Mail, less well known for in-depth coverage of the markets than the FT, today has a story arguing the merger, seen as a take-over, should be stopped. Read it here if you have time on your hands.

— Edited by Martin O'Rourke


Clemens Bomsdorf is a consulting editor on TradingFloor.com

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