Deutsche Boerse has started off its proposed merger with the London Stock Exchange (LSE) by playing nicely. The euro 14-billion German exchange has yet to divulge what cost savings it could achieve from a tie-up, but it's possible to take a guess. So far, the merger looks carefully calibrated to avoid offence.
UBS reckons the average annual cost savings achieved in exchange mergers over the last decade amount to 25 per cent of the acquired bourse's relevant expenses. For LSE, this equates to euro 215 million, the Swiss bank's analysis suggests. Tax those at 25 per cent, capitalise them on a multiple of 10 and assume they take a year to kick in, and the new super-exchange could cook up savings worth a bit more than £1.1 billion in present value at current exchange rates.
That's about the same as the implied premium in the all-stock deal on offer. Based on February 22 closing prices, Deutsche Boerse would pay about a 14 per cent premium to LSE's market price. That also adds up to just over £1.1 billion in value. If UBS's estimated level of savings proved accurate, the German exchange would be handing over all the obvious synergy value to its quarry's shareholders.
This is not to say Deutsche Boerse is overdoing the politeness. The premium isn't especially generous. By stripping out more costs, or achieving often elusive revenue synergies from a larger, broader business strong in both listed equities and derivatives, the German group's own shareholders would win too.
Finding the right balance matters in a merger process that needs to satisfy not only competition authorities but also British and German regulators. Another example of the compromises involved is highlighted by reports suggesting the enlarged group could be headquartered in London but run by Carsten Kengeter, the current Deutsche Boerse chief executive.
Still another is the plan that the merger-of-equals façade would be maintained by the new company's board having equal representation from the two current groups of directors. In merger-land, the overall deal sounds logical. And while the LSE is a City of London icon, it's already run by a Frenchman. But in the middle of a debate about whether Britain should leave the European Union, decisions about what amounts to a German takeover may not remain rational.
