Investors holding stock in London Stock Exchange Group (LSEG) prior to the announcement of its proposed merger with Deutsche Borse could stand to do well out of the deal. The shares have rocketed since the announcement of the potential merger in February, rising by as much as a quarter during the following month. Now in addition to significant cost savings, LSE has flagged sizeable revenue synergies it hopes to achieve as part of its deal with the German stock-trading group. However, some employees of the respective entities may fare less well. In order to achieve its cost savings, management may cut around 1,250 or 14 per cent of existing jobs across its combined workforce.
Potential cost savings and boosted sales have been one of the major selling points used by management touting the deal to shareholders. With the scheme documents now released, we have more detail about how the combined group will try to achieve these savings. In March, the board announced €450m in annual cost savings three years after completion of the tie-up. On top of this, the LSE board now expects annual pre-tax sales synergies of €250m in the fifth year after completion, with around €160m to be gained by year three.
Using the "complementary" geographic footprint and distribution networks of Deutsche's and LSE's index and information services - including FTSE Russell and Stoxx - to cross-sell products, LSE hopes this will provide around a quarter of the expected revenue boost following the completion of the deal. LSE's information services business was the standout performer last year, boasting a 41 per cent increase in sales to £525m.
Expanding the group's global reach has been a prime goal for LSE, in particular growing its footprint in North America and China. The 2014 acquisition of US index specialist Russell Investments has been instrumental in this. Its Russell indices, which are now unified under one brand, have more than $10trn (£7trn) of assets benchmarked to them. The deal with Deutsche will combine two of Europe's largest stock exchange operators by market value, creating a more powerful rival to US and Chinese operators.
The LSE also plans to use the multiple central clearing counterparty (CCP) operations within the combined group to launch further fixed income, currency and commodity trading and clearing products, as well as expanding its range of equity benchmarks. Again, management hopes this will provide another quarter of the planned revenue synergies. Other measures include boosting sales across reference data, regulatory reporting and technology-related services across its combined client base. Management also wants to develop a "liquidity bridge" to make it easier for pre-IPO and listed companies to raise capital and issue debt across Deutsche's and LSE's markets. These growth initiatives could result in 200 new jobs, with a further 350 created via near shore and offshore locations.
Shareholders in LSE will vote on 4 July on whether to accept the tie-up, while Deutsche Borse investors will cast their votes by 12 July. Even after this, the deal will have competition barriers to leap before completion. Regulators will have to feel comfortable with the creation of such a dominant exchange.
