The resignations of Deutsche Börse's chief executive and chairman this week have reignited speculation of a possible tie-up between the operator of the Frankfurt stock exchange and its French-led arch-rival, Euronext.
Things aren't looking bullish for Frankfurt these days
The Children's Investment Fund (TCI), which successfully thwarted Deutsche Börse's ambitions to take over the London Stock Exchange and was instrumental in toppling CEO Werner Seifert and supervisory board chief Rolf Breuer, suggested Tuesday that the German company should tie the knot with the operator of the Paris, Amsterdam, Brussels and Lisbon exchanges.
"It would be fantastic. From a structural point of view, the two (platforms) would fit together well. It would make more sense than a costly acquisition of the LSE," TCI director Patrick Degorce told the business daily Handelsblatt in an interview.
Werner Seifert and Rolf Breuer
It was TCI, Deutsche Börse's biggest shareholder with a stake of around eight percent, that threw a spanner in the works for Frankfurt's plans to swallow the LSE. And the London-based hedge fund also forced Seifert and Breuer to leave of their own accord before they were effectively booted out.
Now, it appears that TCI wants to have its say in Deutsche Börse's strategy as well. Degorce said that a tie-up between the German firm and Euronext "would be good for Europe's financial markets" because it would help cut costs for users, including TCI itself.
Speculation not new
A merger would be made easier by the fact that half of the shareholders of the Frankfurt stock exchange also own about half of Euronext. It is not the first time that such a combination has been the subject of speculation.
"The merger would involve significant cost and revenue synergies, create a European champion and lessen the risk of seeing Deutsche Börse and Euronext fighting separately for expensive targets (such as the LSE)," said Exane BNP Paribas analyst, Claire Langevin, in Paris.
On the other hand, a tie-up could raise competitive concerns since it would give birth to a near-monopoly in derivative products traded on the Eurex and LIFFE futures markets, she cautioned.
The new London Stock Exchange
And at present, Euronext appears to have little desire to tie the knot with Frankfurt. It wants to focus on its own bid to buy the LSE, currently being looked at by the British regulatory authorities, a source close to the matter told the AFP news agency.
For Deutsche Börse, the spectacular failure of its various attempts to get its hands on the LSE over the past few years and the ignoble ejection of Seifert and Breuer means the German operator must go back to the drawing board in its plans to become Europe's leading player.
"If Deutsche Börse loses out to Euronext on the LSE, it may risk being marginalized in Europe," said Citigroup Smith Barney analyst Daniel Garrod.
The debacle has clearly demonstrated the power of investment funds in decisions about corporate strategy. In the immediate term, the temporary lack of leadership will not necessarily harm Deutsche Börse, Garrod said. The German exchange "is fundamentally in good shape," he said. And unlike other companies that have undergone a management reshuffle, "the role of CEO will be more attractive to a new hire," the analyst suggested.
Nevertheless, Seifert's successor, whom Deutsche Börse has indicated will be an outside candidate, will have to come to terms with the power of the investment funds. So it may take some time before an adequate replacement can be found.
Merck Finck analyst Konrad Becker suggested that Deutsche Börse might even be broken up and sold off to fund higher payments promised to shareholders. In the long courtship of the LSE by Deutsche Börse, LSE users frequently argued that the so-called "vertical silo" structure of the German company, combining all different activities from trading to clearing and settlement, was unattractive.
That could therefore place a question mark over Deutsche Börse's Luxembourg-based unit Clearstream or even the highly profitable Eurex venture with the Swiss stock exchange, analysts said.