Hong Kong Exchanges’ Charles Li has chosen an interesting moment to pitch a £32 million ($57 billion) bid for London Stock Exchange, with both London and Hong Kong in the midst of various forms of political turmoil and the LSE in the middle of a transformative $40 billion deal of its own.
It’s also a near-impossible moment. The early indications are that the LSE will itself reject the deal, preferring to proceed with its own acquisition of Refinitiv, a major financial data provider that was once part of the Thomson Reuters group.
Even if LSE were interested, the political obstacles to a Hong Kong acquisition of the LSE are immense, indeed probably insurmountable, and span, not just the UK but Europe and the US. The timing of the move exacerbates those political sensitivities.
Li would have felt he had no choice, given that the completion of the Refinitiv deal would make LSE far too big for HKEX to contemplate acquiring. It’s now or probably never, with ‘’never’’ the more likely outcome.
At face value, and adopting an historical perspective on the sector’s evolution, the combination of LSE and HKEX would make some sense, bringing together the largest securities trading clearing and settlement platforms in Europe and Asia and providing a conduit for capital flows between the UK and China.
London is already the largest external trading hub for the renminbi outside Hong Kong so it would also enable the LSE to dominate offshore trading activity in China’s currency as it grows, inexorably, as an exchange medium for world trade. London could become China’s key portal into the West’s financial system.
The UK is, however, experiencing political chaos as it enters the end phase of Brexit and the de-linking of its economy and financial sector from Europe.
Hong Kong is experiencing violent and ugly protests on an extraordinary scale in response to an apparent attempt by China to tighten its grip on the former British outpost.
China is being confronted by a US administration apparently determined to frustrate its attempts to challenge’s America’s global economic leadership.
The context for the bid is evolving rapidly, as are the strategic priorities for securities exchanges.
Given the choice of a merger with another exchange, which would be in keeping with the massive global consolidation of the stock exchange sector over the past two decades, or a big move into financial data, LSE would probably – will probably -- opt for the latter.
LSE has been in the business of trading securities since the 16th century and has gradually evolved into a global platform for the trading, clearing and settlement of fixed interest securities and derivatives. It is a major data provider and, through FTSE Russell, one of the major providers of financial indices.
Significantly, its post-trade services have a substantial presence in Europe and the US, bringing the HKEX proposal within their jurisdictions.
There have been a lot of cross-border exchange merger proposals over the past 20 years but more have failed than succeeded largely because of the political implications. LSE itself has been involved in at least seven in the past 20 years, including an audacious bid from Macquarie Bank in 2005 and at least three sets of merger discussions with Deutsche Boerse.
While there might be some conventional strategic and synergistic logic in merging the LSE and HKEX, leaving aside the politics, the Refinitiv deal offers something else.
Traditional cash equities trading business are relatively low-growth businesses, with derivatives and post-trade services only slightly more exciting. Financial data provision and analytics are, however, high-margin growth businesses, which explains why ASX is so keen on a strategy of commercialising the vast amounts of financial market data is holds.
That’s why the Refinitiv deal was well-received by LSE shareholders and appears to be preferred by LSE’s board and management to HKEX’s more conventional option.
The geopolitics of the HKEX bid, even as mainland China’s determination to tighten its hold over the ‘’semi-autonomous’’ region is being highlighted daily, are a major issue for HKEX and probably a deal-stopper.
Six of HKSE’s directors are appointed by China, which is the exchange’s largest shareholder.
With a bid that is about 75 per cent scrip, the notion of handing over the centrepiece of the UK financial system to the PRC – a system that will have to cope and adapt to a post-Brexit relationship with Europe - is unlikely to be palatable to a destabilised UK political class that doesn’t need any more distractions or controversies.
The scale of its post-trade services in Europe and the US and the trade conflict between the US and China add more layers of complexity for HKEX.
The US isn’t going to allow China into the heart of its financial markets in the current climate – last year it blocked an attempt by Chinese investors to buy the tiny Chicago Stock Exchange -- while the Europeans want to take advantage of Brexit to build their capital markets platforms and activities, not provide China with a beachhead. Thus, there’s not a lot going for Mr Li and the HKEX and rather a lot against them.
They probably felt they had to have a swing before the Refinitiv deal put the LSE beyond their reach, but the timing forced on them couldn’t have been less propitious.