E.U. Blocks Merger of London Stock Exchange and Deutsche Börse

>But as Britain leaves the bloc making such deals may become even thornier. British companies like the London Stock Exchange will probably be perceived differently, seen instead as overseas buyers.

>“We deal with any company who has a footprint in the European market because we want competition in the European market no matter your flag, no matter your ownership, and that goes for everyone,” Ms. Vestager told a news conference.

>Though the decision by European regulators ended a monthslong effort to combine the two operators, the announcement itself was widely anticipated.

>Last month, the London exchange said that the deal was unlikely to be approved after European regulators — who had opened an investigation in September — unexpectedly added a condition that it sell a majority stake in MTS, an electronic platform for trading European government bonds and other fixed income products.

>The London Stock Exchange called the remedy “disproportionate,” arguing that any such sale would set off additional regulatory processes in Europe and the United States, and would be detrimental to its businesses in Italy, where it operates the Borsa Italiana.

>On Wednesday, it said it “regrets” the Commission’s decision to block the merger, but was confident in its prospects as a stand-alone business.

>The chairman of Deutsche Börse’s supervisory board, Joachim Faber, meanwhile, said the decision was “a setback for Europe.”
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>“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,” he said in a news release.

>German regulators and lawmakers had also become increasingly concerned in recent months about the combined company having its headquarters in London after last year’s referendum in Britain on European Union membership. They have pushed for the headquarters to be in Frankfurt.

>Prosecutors in Germany had also opened an inquiry into the timing of the purchase of Deutsche Börse shares by Carsten Kengeter, the Deutsche Börse chief executive who was set to head the combined company. The shares were purchased months before the exchanges announced their merger, but investigators are looking into whether they were secretly in talks at the time of the share purchase.

>Mr. Faber, has said the accusations have no basis, and Mr. Kengeter has called them “unfounded.”

>Deutsche Börse and the London Stock Exchange had hoped to create a potential European champion by combining stock exchanges in Britain, Germany and Italy, as well as several of Europe’s largest clearinghouses.

>That would have helped the combined company compete with United States rivals like the Intercontinental Exchange, the owner of the New York Stock Exchange, and CME Group, which operates the Chicago Mercantile Exchange, Chicago Board of Trade and the New York Mercantile Exchange.

>In seeking approval for the deal, the London Stock Exchange Group agreed in January to sell LCH, the French operating arm of the LCH.Clearnet Group, after saying it was seeking to “address proactively antitrust concerns raised by the European Commission.” The sale was contingent on the approval by European regulators of the Deutsche Börse-London Stock Exchange transaction.
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>But the European Commission did not find that to be convincing, saying it would have created an effective monopoly in the clearing of bonds and other fixed income products in Europe.

>The commission also found that the merger would have removed so-called horizontal competition for the clearing of single-stock equity derivatives. Regulators found that the parties proposed remedy of selling LCH would have addressed only its concerns about single-stock equity derivatives, but not its unease about fixed income clearing.

>The Intercontinental Exchange had been seen as a potential rival in the deal for the London Stock Exchange, but it opted in May not to pursue an acquisition. The rejection of the Deutsche Börse merger, however, now raises questions about whether the Intercontinental Exchange would take another look at the London exchange.

>“A weakened L.S.E. may need to look west for a future partner and strategy,” said John Colley, the associate dean of Warwick Business School at the University of Warwick in Coventry, England.

>Mr. Colley said that while the London Stock Exchange’s business was performing well, “there is very likely to be some fallout from Brexit.”

>The Intercontinental Exchange was one potential bidder, he said, particularly given the weakness of the British pound against the dollar and the reduced cost of borrowing in an environment of historically low interest rates.

>“The L.S.E. is now vulnerable to a bid,” he said.

>Deutsche Börse, however, does not have many potential targets for mergers in Europe, and will probably try to attract stock listings and trading from Britain following Brexit, Mr. Colley said.