Opening Cross: Forget the Harlem Shake; Do the Deutsche Shuffle

Even before they confirmed merger negotiations, it was clear to see that the London Stock Exchange and Deutsche Börse had much in common.

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Deutsche Börse: has a new corporate strategy, dubbed “Accelerate,” is shuffling acquisitions and divestments like a poker player trades cards, and—not to be put off by past experience—is once more making a play for its UK counterpart, the London Stock Exchange. And while the Deutsche Shuffle may start out as a solo act, it’s really a dance meant for two partners in perfect step with one another.

Deutsche Börse and the LSE certainly appear to be in step with each other on a number of key initiatives of late. Both recently made significant acquisitions to strengthen their respective index businesses: In 2014, the LSE bought the Frank Russell Company to gain control of its Russell Indexes business, giving it a US-focused complement to its existing FTSE index business, having acquired full ownership of FTSE—previously a joint venture with publisher Pearson—in 2011. 

And last year, Deutsche Börse followed suit, acquiring the entirety of the Stoxx index provider and Indexium index calculation businesses­—previously joint ventures with the SIX Swiss Exchange

These index acquisitions certainly aren’t a surprise: the shift towards self-directed investing, plus regulatory changes designed to separate asset owners from operating indexes mean the space is booming, as evidenced by the fact that everyone from exchanges to major data vendors and startups is looking to claim a slice of the pie. Deutsche Börse officials refer publicly to the “high-growth exchange index market,” and describe the Stoxx acquisition as bringing new growth potential to the exchange. After all, owning indexes isn’t just about selling index data—the real money comes from licensing indexes and creating investible products, from exchange-traded funds to futures on indexes. Indeed, the LSE’s acquisition of Russell meant that the combined FTSE Russell business had more than $9 trillion in assets benchmarked to its indexes at the time of the deal. Under a merger, the combination of FTSE Russell and Stoxx would create the world’s largest index provider, industry analysts say.

And just as the two exchanges agree on indexes being a core business focus going forward, they also agree on what isn’t: traditional data aggregation and display businesses. The LSE first exited this space in 1994, when it sold its Topic data workstation to ICV. Topic then became a mainstay of Thomson Financial’s UK and European business, and in 2003, the LSE re-entered the space by buying Proquote, before changing its mind again and selling the UK-focused data display business last year to Australian data and trading terminal vendor Iress (IMD, Sept. 16, 2015). Again following suit, Deutsche Börse last week sold its 50 percent stake in Spanish data vendor Infobolsa, handing complete control of the business and its subsidiaries to former partner, Spanish exchange group Bolsas y Mercados Españoles. The deal represents small change for Deutsche Börse, so is presumably more about cleaning house to focus on more important matters—no doubt including its plans for a “merger of equals” with the LSE and creating a gargantuan index business.

At a briefing on Feb. 18, chief executive Carsten Kengeter described Deutsche Börse’s Accelerate strategy as having an “ambitious medium-term growth target, whereby we… generate profits which rise at a faster rate than revenues,” adding that it “will rely on organic growth as well as on mergers and acquisitions” to achieve this goal. To this end, acquiring the exchange and the FTSE Russell index business would be an acquisition that could potentially set the stage for high-growth organic expansion into new, index-related business areas, such as ETF sponsorship, perhaps? Again, this wouldn’t be a huge surprise, given the LSE’s acquisition of ETF data and ratings specialist XTF at the end of last year for an undisclosed sum.

As the pieces of this puzzle come together and the potential inherent value becomes clear, might this be the tipping point that helps this deal succeed where previous efforts failed? 

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