EI Special: RIP DB1-LSE Merger of Equal Desperation

Unlike this morning’s bulletin edition 963, this issue does correspond to a Porsche of course, AKA the 964, the 1989 – 1993/4 version of the 911/911 Turbo – truly delightful motor cars which updated the 911 when Porsche realised they simply couldn’t phase out when the 928 came in, due to customer demand. A splendid example of the best of German corporate management decisions – a pragmatic U turn where the market dictated a coherent response.

Now, to the reason for this special edition:

In This Exchange Invest Special

No Point Beating About The Bush: Yes, I Told You So…

Clearly there is one key story here – just as I noted Brexit was highly likely…from the moment the breath was still warm in the misguided announcement of what I termed the “Merger of Equal Desperation” I made it expressly clear this deal would never get through antitrust.

It seems a bare handful of us realised that then and we have listened to a somewhat unrelenting stream of what may be politely termed sub investment grade outpouring from many quarters ever since as this badly conceived, ill-timed and poorly managed merger process has eventually ended up where I accurately predicted at its inception over a year ago – on the scrapheap.

It is not a good moment for either DB1 or LSE. It is a very sad moment for long-term shareholders and it has ramifications for the parish, as a result of the often questionable practices of the merging parties in their haste to squeeze an a egregious monopoly under the noses of an EU Competition authority which has once again proven wise in defending the best interests of the EU’s citizens and indeed this parish as a whole within the European Union and far beyond.

In BigWorld

#Brexit.

Public Markets

Mergers: Commission Blocks Proposed Merger Between DB1 & LSE
EC Europa
DG Comp Prohibition Video
EC Europa
Recommended All-Share Merger Between London Stock Exchange Group Plc And Deutsche Börse AG – Termination Of The Merger Following EC Decision

EU Commission Prohibits Merger Of Deutsche Börse And London Stock Exchange Group – Deutsche Börse To Focus On Continuing Its “Accelerate” Growth Strategy – Focus On Boosting Innovative Strength And Client-Centric Approach – Deutsche Börse To Support The Development Of The German Real Economy, And The Frankfurt Financial Marketplace, Through New Offers And Initiatives

A Bad Deal Done Badly

“It may seem like rocket science but our competition concerns in this merger are very simple. In some markets DB1 and LSE provide the same services and in some markets they are essentially the only players and therefore the merger would have led to a de facto monopoly.”
Margrethe Vestager

PLY: And with that, as I consistently said since the morning it was announced last year, the “Merger of Equal Desperation” has been, as anticipated by myself (via Exchange Invest and other channels), quashed. I applaud the EU Competition Commissioner Margrethe Vestager for her sensible and entirely coherent line on this deal – which essentially tallies precisely with the fault lines I recognised as soon as the fruits of these exchanges’ impetuosity was in the public domain.

(In case you have forgotten as it was a long long time ago, my input began thus: Exchange Invest March 16, 2016):

“PLY: Hmmm, industry defining – what like British Leyland was to the UK car industry? No change to the deal as previously suggested by mainstream media and still no clear understanding why the companies think they are going to spend a fruitful year or more with EU antitrust. Presumably powder being kept dry for the anticipated other bids.”

I have expanded since that brief, dismissive paragraph but the issue has always been the same: What on earth was going through the minds of the CEOs in question which really left them believing they could get away with this attempt to create an egregious monopoly?

(It all revolved around a little bit of wordplay between OTC and ETD but nobody literate in market structure could be convinced by the haughty superiority of some cash market investment bankers turned exchange bosses).

Of course other bids didn’t appear (which I still suspect was the XavRol strategy, encouraging a bidding war to give him a perfect exit…) Instead within weeks he appeared to be diminished to stand behind the tea trolley after missing out on the big job as joint CEO.

The Merger of Equal Desperation itself didn’t survive even the initial scrutiny. It may be forgotten now but this takeover was originally predicated on the DB1-LSE delusion of cross border CCP offsets. This was all the more bizarre as LCH owned Clearnet and that had been the defining proof that cross border offsets just don’t work. (Who knows maybe if they had updated the IT system earlier they might have found the databases which proved it?).

That the DB1 and LSE C suites existed in a bubble had long been a worry and it soon became apparent as in their haste to do a deal (indicating that their management approach is essentially of the ‘one trick’ variety), they completely failed to appreciate the risk of a Brexit referendum vote going against their narrowly focussed Europhile standpoints. (Again they could have saved a few hundred million here by just asking me – in an irony of ironies while spending money like footballer’s wives on crystal meth…oh never mind…you get the gist, other minutiae may well emerge in due course).

It actually only took 2 minutes to unravel the deal’s achilles heel of antitrust and that was achieved by St Me’s Day last year in one simple video: Understanding CCP & the AntiTrust DB1-LSE Merger.

(Total budget for that masterpiece (sic) was indeed about 22 Twix bars and a morning of me and my Polish assistant’s time) – or about 4 seconds of the “MOED” agitprop budget for communications (sic)).

The Wasted Opportunity

Thus it took the DB1 and LSE more than a year to be brought to a realisation their deal could not be done. It remains unclear they even understand why it could not be allowed, given their swaggering hubris at the top – after all DB1 are still in denial that their attempt to merge with NYSE Euronext was a dismal concept for anything but the resulting monopoly. Moreover this farago has cost shareholders a goodly 300 million or so in direct fees as well as gifting the opposition a chance to attack during what was in the end a year wasted by both companies. Why shareholders are not furious escapes me – or perhaps they will be, when they discover that a handful of independent figures including myself were right…and meanwhile a vast phalanx of PRs, advisors, consultants, tea boys and investment bankers were all utterly incapable of understanding the dynamics of the deal as doomed. True, perhaps some of them did follow said doomed dynamics and just pocketed the cash…not quite in the client’s best interests but I get the gist that it’s a dog eat dog world in the kennels of Paternoster Square and Eschborn.

The most worrying issue in the long term is how this deal demonstrated to many onlookers what could be perceived as a callous ruthless short term disregard for the ethics of running regulated businesses.

As I noted on March 17th last year:

“PLY: The “street sweep” is not a sound approach to demonstrating a stewardship of markets but without any deal break fees, clearly LSE has its ideal position, Xavier is shopping for a better price and about to leave DB1 stranded…”

…Of course that the ‘street sweep’ happened to deliver a majority of the votes in LCH’s potentially fractious partnership within SwapClear was doubtless a mere coincidence.

Other incidents culminating in an ongoing insider dealing investigation would be deemed ludicrous if they emerged in potboiler fiction. The parish has suffered as a result of the antics of a privileged few and that is something which deeply annoys me and many other parishioners.

The Future RoadMap

Let’s face it both exchanges are now as lost as a blindfolded toddler in a multistorey car park. They both need direction, and fast. An outbreak of management would be great too – not the decent operational folks manning the daily tasks who have maintained their focus but actually some coherent (devoid of ego) strategy management and genuine operational management to reorganise the bits which have been left to fester in both enterprises.

Despite having days to react, all that has been said so far is the usual valedictory drivel.

Both reckon it’s business as usual, in which case one has to ask:

If business as usual was such a good idea, why did the CEOs of both groups risk their careers (and possibly an insider dealing prosecution) spending hundreds of millions of dollars and countless man hours, pursuing this deal?

LSE say they will carry on doing whatever it did before (which means they won’t be doing much integration or delivering that new LCH IT system then, presumably) That is a great pity. It’s time for change.

Albeit in reality this is the final hurrah in what had previously been a remarkable run by Xavier Rolet as CEO. He transformed LSE Group but didn’t digest as he ate, leaving a messy backlash needing management (not micromanagement, just management) to integrate and rectify. His days must be numbered and LSE would do well to see the sapient Chairman Donald Brydon administer the knife ASAP so we can at least perceive LSE is eager to progress , perhaps even atone…

Meanwhile DB1 will concentrate on their “Accelerate” program. As befits an entity led by an impetuous investment banker, the aim is therefore to go very very fast indeed. The problem is the speed does not seem to be accompanied by a coherent concept of where all this velocity is meant to reach. Without such a clear goal in mind, it is reminiscent of the strategy which involved beer, shots, a Porsche 911 GT3 and a rather fiery end result for former TV presenter Ryan Dunn. Deutsche Boerse is it seems in a hurry, destination unknown, determined to go ever faster but without a safe pair of hands at the steering wheel. I hope they don’t end up looking like that unfortunate man from JackA**.

Macro Issues

As previously discussed elsewhere (and to be examined in more detail soon in our Premium service), the curtailment of the “MOED” signals clearly that in the main, the end of the mega-merger wave is probably now in sight. There may be deals to be done but they require, tact, skill and self-awareness – none of these facilities have been much in evidence as DB1 and LSE developed a bunker mentality to their daft deal and a staggering hubris it seems too.

DG Comp: A Damning Indictment of Both Parties

Ultimately Margrethe Vestager was at her steely best in the press conference today denying this egregious monopoly a mandate. Moreover her reasons stretched across CCP and with it fixed income / repo, almost verbatim as I had discussed in past client calls et al.

However, that is only one part of what was a remarkable press conference which outlined the last minute grandstanding of the merger parties in suggesting their remedies. (“How dare they!” was the apparent first reaction from various parishioners). Frankly this was teenage stuff and the EC simply proved as unimpressed as any High School teacher would at such perceptibly arrogant behaviour. It certainly looks petulant from the descriptions of the Commissioner but it may have been evidence of incompetence or indecision, we may never know.

Then again Reto was the world champion of the civil service mentality of keeping his head below the parapet. Carcrash has been a much more public train wreck, (to layer my metaphors) and is now facing ongoing insider dealing investigations. That the latter issue has been defended by the Chairman of DB1 is in the eyes of many parishioners, a disgrace.

However the DB1 Board is notoriously spineless (with the honourable exception of a few brilliantly spiky thinkers and doers amongst the ranks of the consensus hungry lapdogs). So, although in the eyes of the parish (judging from my inbox dating back months) the DB1 CEO has lost the confidence of the parish. However with his board, he is probably safe for now…but I suspect many will say it would be best for the parish if he actually did leave at the latest when his contract expires next year.

In essence, the LSE Chairman would be well advised to clean house and empower some of his highly talented managers to move forward while bidding farewell with thanks to Xavier and what he achieved for LSE until about 18 months ago (when he became apparently little more than salesman shopping the LSE Group, arguably more for his best interest than the company’s). DB1 can consider the position of its Chairman and CEO, while following on from Jeff Tessler’s indication he would not continue when his contract expires, it must now be the end of the road for Andreas Preuss. I have long admired Andreas and his many achievements with DTB, EUREX and elsewhere. However his imprimatur has been too close for comfort to the concept of mega mergers for too long, I fear, to avoid his being politely retired.

“All political careers end in failure” And All That.

In essence, this has been a long and bruising fight. Neither DB1 nor LSE are especially (er, remotely) good at admitting their mistakes but after the catalogue of broadly unforced errors in this process, it is time they consider their position in the parish and return with an olive branch to regain the confidence and at least some of the standing they once enjoyed but have inconsiderately squandered through their stubborn streak of hubristic blindness to the regulatory realpolitik.

Their destiny is back in their hands. I sincerely hope we can witness peace in our times and a return to enterprising, growth through focussed management by both entities. That would be good for them and good for the parish.

Patrick L Young
Publisher Exchange Invest
ExchangeInvest.com

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Patrick L Young
Executive Director DV Advisors

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