By Ben Dummett and Anna Isaac
London Stock Exchange Group PLC's dismissal of the Hong Kong exchange's almost $37 billion takeover attempt underscores the challenges global exchanges face trying to complete cross-border deals amid geopolitical upheaval.
Hong Kong Exchanges & Clearing Ltd. made its audacious move in September on its London-based rival, betting the deal would solidify its role as a gateway for the flow of capital between mainland China and Western markets. But it came less than two months after the LSE and its recently appointed Chief Executive David Schwimmer agreed to acquire Refinitiv Holdings Ltd. for $14.5 billion, with the intention of becoming a fully fledged financial data provider.
The LSE board quickly rejected the HKEX approach, arguing the Refinitiv deal made more strategic sense and would more easily pass regulatory muster. The Hong Kong exchange responded Tuesday by pulling its offering, arguing that pursuing the deal didn't make sense without any input from LSE's management.
Typically, the Refinitiv deal would be reason enough for the LSE to look askance at the HKEX bid, as it required an end to that tie-up, which shareholders had wholeheartedly supported. LSE shares dropped more than 5% after the HKEX bid was rescinded. Its shares remain up more than 70% for the year, much of those gains coming since the announcement of the Refinitiv deal.
"Any bid was going to have to be a knock out bid because the share price has performed so well recently in response to the Refinitiv deal," Russ Mould, investment director at AJ Bell, which provides investment platforms and stockbroker services, said Wednesday.
LSE had even more reason to dismiss HKEX's overtures given its previous failed attempts to complete big cross-border deals. In 2011, it tried unsuccessfully to merge with Canada's TMX Group Ltd. In 2017, an attempt to join forces with Germany's Deutsche Boerse AG also foundered.
Those failures came amid domestic concerns over foreign ownership of a crucial part of Canada's capital markets, the head office location for the proposed LSE-Deutsche Boerse company and the risk of such a deal creating a combined entity with monopolistic pricing power.
Since then, the challenge of pushing through cross-border deals has risen further, amid concerns that some Chinese companies are using acquisitions to gain access to assets ranging from technology to sensitive data and financial information. Regulators in the U.S. and Europe have both moved in recent years to broaden their scrutiny of bids for key assets by foreigners.
"The issue of greater Chinese influence over the City of London would be a hard-sell for a lot of people," Mr. Mould said.
Last year, the Chicago Stock Exchange ended its two-year effort to sell a major stake to Chinese investors after the proposal sparked worry the deal could imperil the security of the U.S. financial system, even though the market handled less than 1% of U.S. stock trading volumes.
Hong Kong is a semiautonomous city. But China's encroachment has sparked months of protests against the local government, heightening investor concerns over China's future influence over the exchange.
"The political situation in Hong Kong, the influence of the Hong Kong authorities over the HKEX board and by extension, the Chinese authorities was difficult," Mr. Mould said.
The Hong Kong exchange's withdrawal didn't surprise analysts. The proposed tie-up would have been "a very difficult deal to deliver, both because exchange mergers are fraught with complications and because of potential U.S. worries about the ownership of LCH," the London exchange's majority-owned clearing unit, Bank of America Merrill Lynch, said.
HKEX had signaled its confidence in ultimately winning regulatory approval for the LSE tie-up, saying that it had held discussions "with a broad set of regulators" as part of its negotiating effort.
Still, the company would have faced an uphill battle in the U.K., if not other jurisdictions. The U.K. Financial Conduct Authority and the Bank of England worried that China would have access to key data moving between the HKEX and LSE, as well as critical market infrastructure such as LCH, people familiar with the matter said.
By rejecting HKEX's takeover offer, LSE places itself under more pressure to deliver on its promises from the Refinitiv tie-up, which include more than GBP350 million ($428 million) in annual cost savings. The London exchange expects the deal to close in the second half of 2020, but must first conduct its own lengthy regulatory review and a complex integration process to meet its targets.
It also faces the prospect of competing directly with Bloomberg L.P., whose terminal competes against Refinitiv's Eikon product and commands a market-leading 32.6% share based on revenue, according to data information firm Burton-Taylor International Consulting.
Write to Ben Dummett at firstname.lastname@example.org and Anna Isaac at email@example.com