Cross-border M&A among exchanges has proved difficult lately. The latest attempt, the purchase of the London Metal Exchange by Hong Kong Exchanges and Clearing, might actually go through - but with what result?

Hong Kong Exchanges’ bid for the LME follows several failed exchange merger attempts of last year (NYSE Euronext/Deutsche Boerse, LSE/Toronto’s TMX, and Australia’s ASX/Singapore Exchange). The bid is not transformational, as there is very little synergy potential – it is mainly one party bringing its target acquisition closer to its (almost) primary market. The LME sets the price for the vast majority of the world’s base metals and HKEx stands at the gateway to China, the world’s largest consumer and producer.

The price being paid is eye-watering: £1.388 billion is almost a 75% premium over the £800 million reported as NYSE Euronext’s bid before it dropped out of the running last month – though the ICE bid allegedly came very close. It values the LME at 180x net income and at 22x the last traded price for the exchange’s shares. It opens up HKEx to accusations of overpaying, but then again, how do you value something unique? The LME is comfortably the major center for the trading of metals derivatives contracts, with a global market share of about 80%.

The price and assurances on the maintenance of transaction terms and LME’s business model look likely to win shareholder approval – though could ICE try to disrupt the party as it did a few years back in Chicago? The approval of the UK regulator looks a little more complicated (political interference is possible, with yet another UK exchange passing into foreign hands), but may well be granted: the LME will remain under UK oversight, and HKEx has undertaken to maintain a robust governance structure (although this last promise might merit examination, coming as it does from an exchange which has six of its 13 board members appointed by the Hong Kong government).

In the wake of the announcement of the bid’s acceptance on Friday June 15, 2012, HKEx’s share prices tanked (though recovered some ground on Tuesday), indicating negative market sentiment that is partly due to the high price being paid, but may also signal concerns over the strategic issues that will determine the success or failure of the investment.

The HKEx strategy depends not only on the continued vitality of Chinese growth, but also on the loosening of rules that impede Chinese firms’ access to foreign exchanges. The determining factor may ultimately be the willingness of the China Securities Regulatory Commission (CSRC) to allow HKEx to compete on the same terms as the mainland Chinese exchanges. Small wonder, then, that we see nervousness reflected in HKEx’s share price.