A Cautionary Tale
Reduced IT/systems costs is one of the major economies that has been advanced to motivate/explain/rationalize exchange mergers. It is quite risky to bet the farm on realizing these economies, however. Integrating IT systems is always a tricky endeavor given their complexity and idiosyncracies. Much of the information regarding systems lives in the heads of individuals who can leave the merging firm (and since cutting IT headcount is one of the sources of “savings” many are indeed destined to leave). Moreover, fixes of past problems, or implementations of various systems, are imperfectly remembered even by those that remain.
Case in point–LCH.Clearnet. The whole “story” behind the merger was that the merger would allow the creation of a single, efficient clearing IT system to replace the legacy systems of the merger partners, LCH and Clearnet. Three years and many millions of pounds sterling later, the merged entity has not realized these benefits. LCH.Clearnet’s chairman resigned in May, and just recently the CEO David Hardy resigned. His resignation was directly attributable to the difficulties in the IT implementation. A ComputerWeekly article provides a detailed account of the problems, delays, and cost overruns.
To me, this suggests that an exchange merger makes sense if the products of one exchange can be migrated to the existing system of the other partner to the merger. For instance, moving NYMEX products to CME’s Globex, or NYBOT products to CBT’s electronic system (or ICE, as rumor now has it) would not face the type s of challenges that have heretofore stymied LCH.Clearnet. Conversely, mergers involving major systems integration (which seems to be the case for NYSE-Euronext) are much riskier. Indeed, as it is rare (unprecedented?) to read of systems integrations that went more smoothly than anticipated, all of the risk seems to be on the downside.
So a word to the wise would-be empire building exchange CEO. Building empires can be fun–if it doesn’t cost you your head. If the economic case for a merger is predicated on realizing IT savings, that is a very real risk indeed.
