The European Commission has officially blocked the proposed mega-merger between the London Stock Exchange and Deutsche Börse, citing competition concerns.
The writing has been on the wall for the faltering marriage since February after the LSE insisted that it would not cave to EU regulators' demands that it divest its 60% stake in Italian bond trading platform MTS.
Commissioner Margrethe Vestager, in charge of competition policy, says: “The merger between Deutsche Börse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments. As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger.”
The LSE had already bent to earlier demands from competition authorities, agreeing to offload its French clearing business LCH.Clearnet. A deal with Euronext to take over the business will now also be terminated.
The Commission says that market tests of the proposed divestment indicated that the sale would have alleviated concerns relating to single stock equity derivatives, but failed to address the creation of a monopolistic hold on fixed income clearing.
The proposed merger has been under strain for some time, ever since the British public voted in favour of a break from the European Union. It is thus fitting that the Commission's blocking of the merger comes on the day that British Prime Minister Theresa May is expected to trigger Artilce 50 and formally begin the process of extraction from the EU.
Joachim Faber, chairman of Deutsche Börse says: “The prohibition is a setback for Europe, the Capital Markets Union and the bridge between continental Europe and Great Britain. A rare opportunity to create a global market infrastructure provider based in Europe and to strengthen the global competitiveness of Europe’s financial markets has been missed.”
With the deal now off the table, the two exchanges may find themselves wooed by bids from American rivals such as Intercontinental Exchange and CME Group.
The LSE will be most vulnerable to a take-over attempt from across the water says John Colley, Professor of Practice at Warwick Business and an expert on mega-mergers.
"Whilst the business is performing well at the moment there is very likely to be some fallout from Brexit. A weakened LSE may need to look west for a future partner and strategy," he says. "There is likely to be plenty of interest from that quarter where Chicago's Intercontinental Exchange (ICE) has grown rapidly in recent years through acquisition. Dollar strength against Stirling and low costs of borrowing suggest that ICE will come calling very quickly. The LSE is now vulnerable to a bid following the failed merger and an ambivalent CEO."