4 August 2016 – In March 2016, the London Stock Exchange (LSE) and Deutsche Börse AG (DB), the two largest trading venues in Europe, announced their intention to merge. Last month shareholders of both entities approved the merger which makes approval by the European Commission the final hurde to take.
European Investors appreciates the increased scale and scope that can be achieved through mergers and acquisitions and the associated benefits for investors in terms of liquidity, price discovery and cost structure. However, due to the dominance that will be acquired by LSE/DB and the anticipated anti-competitive effects of the merger, European Investors is highly concerned about its implications for investors. LSE/DB will have a market cap of €26 billion, ten times that of Euronext, its closest competitor.
European Investors has therefore written a letter to Margrethe Vestager, who heads the European Commission’s directorate-general responsible for the approval of the merger.
The merger of LSE/DB means that in several critical market segments there will be a move from a situation where there is substantial competition among three major market players to a quasi-monopolistic one in which the merged entity is overly dominant. Therefore, the merger will result in a substantial lessening of effective competition and reduction of freedom of choice.
For instance, the merged entity will become a ‘super’ dominant provider of pan European benchmark indices. DB (with Eurostoxx 50 and Stoxx 600 indices) is number one and already dominant on this market. The merger will combine DB indices with those of LSE (FTSE/Russell indices), its only important rival at the moment. Consequently, LSE/DB will be able to determine the eligibility criteria of all these indices, on which a large number of financial instruments in Europe are based and which are key instruments for asset managers that drive their investment decisions.
European Investors also fears smaller exchanges, such as Euronext, might experience a decline in scale and scope with associated negative implications for investors and listed companies. Trading volumes and liquidity will gradually go down, causing higher transaction costs and bid-ask spreads to widen. Also, smaller exchanges in continental Europe may diminish in relevance for SMEs and might no longer be able to continue to play a pivotal role in the financing of the real economy.
And finally, a critical element in the equation involves the real possibility that companies seeking a listing on LSE/DB in the post-Brexit environment will circumvent DB, thus avoiding important EU rules in areas where the UK regime seems more malleable. LSE/DB, on the one hand, and the European continental exchanges, on the other, will not compete on an equal footing.
European Investors urges the Commission to take these considerations into account when investigating the planned merger.