Streetwise Professor

May 25, 2006

Another Exchange Merger Skeptic

Filed under: Exchanges — The Professor @ 10:12 am

In today’s FT David Lascelles expresses skepticism about the logic underlying exchange consolidations, specifically the NYSE-Euronext tie up. He too seems mystified as to the source of scale and scope economies. He also notes that the cultural challenges facing a merger should not be dismissed:

By the same token, Euronext’s natural partner at the international level is surely Deutsche Börse because of their shared European traditions and outlook. I have seen such an alliance described as a “marriage from hell” because of the number of potential warring parties, but it must have more going for it than a Euronext-NYSE marriage run by the cultures, respectively, of the French énarques (administrative class) and Goldman Sachs.

Another article, this one in Europolitix gives the lie to the idea of “shared European traditions and outlook.” To quote the article:

The EU’s internal market chief Charlie McCreevy has become embroiled in the proposed takeover of France’s Euronext stock exchange by Germany’s Deutsche Börse.

According to internal commission documents seen by German newspaper Handelsblatt, Charlie McCreevy’s department appears to support the French government’s opposition to Deutsche Börse’s proposed takeover of Euronext.

Paris wants the German company to restructure before completing a bid for Euronext, spinning off its clearing and settlement operations that focus on the transfer of ownership of stocks and shares.

McCreevy’s department agrees, arguing that separating the Clearstream clearing and settlement operations from the stock exchange business will create more price transparency and greater competition.

The German paper calls the stance “a full frontal attack on the German stock exchange”.

One can almost imagine the parties facing off across the bargaining table, with the Germans sporting Pickelhaubes and the French kepis. “European Union” is an oxymoron whenever French and German interests clash. They gladly cooperate when they can shaft the British or the Poles, but they fight like in the old days when it’s a French business interest vs. a German one.

Clearing and settlement is ostensibly the key issue in the German-French exchange dispute. The German exchange, Deutsche Borse, has an integrated clearing and settlement operation. Euronext does not. Euronext wants DB to spin off clearing as a precondition to any deal. DB objects. EU competition authorities have expressed concerns that integrated clearing and settlement impedes inter-exchange competition. The economics of this are by no means clear. I plan to give this issue further consideration. Stay tuned for my take.

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