Hong Kong Exchanges & Clearing’s (HKEX) $39 billion bid for London Stock Exchange (LSE) Group presents the London exchange with two alternative models of how an exchange should look in the modern world.
HKEX’s bid is an argument for scale; LSE’s existing deal with Refinitiv positions it for a future based on data.
It is easier to see why HKEX would make the bid than why LSE would accept it – which it hasn’t, instead turning it down with considerable sting, although every sensible target refuses the first bid.
HKEX sees a world dominated by exchanges such as Intercontinental Exchange, which owns the NYSE and the Chicago Stock Exchange, and CME, which owns the mercantile exchanges of Chicago and New York, and the Chicago Board of Trade.
It sees Japan Exchange Group acquiring the Tokyo Commodity Exchange. It wants global scale.
It would hand it over to the Chinese through the Hong Kong back door
– Neil Wilson, markets.com
CEO Charles Li is amid a strategic plan under the tagline ‘China anchored, globally connected’, and this would clearly fulfil the second part.
It would create a global powerhouse offering 18 hours of trading across the Asian and European markets, with strength in stock, derivative and commodities trading and clearing houses in two continents.
It would give HKEX not only access to the LSE itself but other assets, including Borsa Italiana and index provider FTSE Russell. It would also remove concentration risk from troubled Hong Kong and powerful China.
But that’s exactly the reason LSE was right to say no to the deal in its initial form.
The majority shareholder in HKEX is still the Hong Kong government almost two decades after Hong Kong’s stock and derivatives exchanges were merged and then listed.
The exchange is intrinsically linked with city politics, with chair Laura Cha also a member of the Executive Council of Hong Kong; and, by the way, vice-chairman of the International Advisory Council of the China Securities Regulatory Commission.
By extension, Beijing controls it; and even if we accept that Hong Kong still has autonomy under the Basic Law, that mini-constitution expires in 2047, at which point the territory is unequivocally China’s to do what it wants with.
That’s 28 years away, which sounds a long time, but not in the context of the LSE’s three centuries of history.
Consequently, it would be unlikely to be approved anyway.
Most in Asia still remember Magnus Bocker’s bold bid for the Singapore Exchange to take over the Australian Securities Exchange; it was a great plan, apart from the fact that nobody believed it would get regulatory approval, and it didn’t.
LSE, in turn, remembers the three failed attempts it made to merge with Deutsche Börse.
China controlling the London Stock Exchange is a bigger political deal than either of those failed transactions.
The UK business secretary Andrea Leadsom has already said the UK government would scrutinize such a deal for security implications, and it’s hard to see any way the government would approve it.
“The UK government may not wish to see such a vital symbol of UK financial services strength, and indeed a strategic asset, to be owned by foreigners,” says Neil Wilson of markets.com.
“Effectively, it would hand it over to the Chinese through the Hong Kong back door.”
And yet there is one argument that UK government scrutiny might behave a little unpredictably: Brexit.
If the UK leaves the EU, there is perhaps some merit in a pan-continental alliance to keep London as a vital financial centre. It would expose LSE to the internationalization of the renminbi, keeping it relevant in the key currency trend of the next 50 years.
Problem is, even if the UK state were to take that view, LSE has a different vision of what an exchange should be.
Its bid for Refinitiv – which would have to be scrapped under the HKEX bid – tilts the exchange’s fortunes heavily towards financial data rather than just listing fees and trading revenues.
Hong Kong is not blind to this idea: in February, HKEX said it would buy Ronghui Tongjin Technology, a technology services provider in China.
But HKEX still wants global scale and seems to believe it can get past the regulatory hurdles involved. Perhaps its success in acquiring the London Metal Exchange in 2012 has given it confidence.
The behaviour of the LSE share price after the bid, never getting anywhere near the premiums the bid inferred, suggested the market didn’t think it would happen and it was no surprise when LSE rejected it out of hand on Friday.
It was strikingly terse in doing so. It didn’t just dismiss the bid but appeared to discourage revised bids, saying “given [the offer’s] fundamental flaws, [it] sees no merit in further engagement”.
It expressed its surprise and disappointment at HKEX going public with the bid two days after telling the LSE.
It said the offer was undervalued, strategically unsound, and that “the ongoing situation in Hong Kong adds to this uncertainty. We question the sustainability of HKEX’s position as a strategic gateway in the longer term.”
Ouch. Is that final?
Well, HKEX now has another three weeks to come up with a revised bid, and will spend much of it talking to the people beyond the LSE board who matter most: the shareholders.
The biggest of them all is the Qatar Investment Authority, which owns 10%. Convince the Qataris of the global merits of the deal, and things could start to get interesting.