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HKEX faces uphill challenge to win over London stock exchange
Unsolicited surprise bid for LSEG is unlikely to succeed after being soundly rejected in two days due to probable unease over Chinese control
17 Sep 2019 | Keith Mullin

“In reality, there is seldom a perfect time to undertake a merger or acquisition … if we don’t try, then of course by definition we fail.” So said Charles Li, chief executive of Hong Kong Exchanges and Clearing, in his blog about HKEX’s 29.6-billion-pound (US$37 billion) unsolicited conditional cash-and-shares bid for the London Stock Exchange Group (LSEG) on September 11. Which was rejected after just two days.

And he’s right. To be fair, on one level, HKEX’s timing could have been seen as a sign of confidence in the future of London as a global financial centre just as the UK descends grotesquely and humiliatingly into utter political chaos around Brexit and becomes the laughingstock of Europe and the world.

But while there may seldom be a perfect time to undertake a merger or acquisition, there’s most definitely, on another level, a really, really bad time. And with Hong Kong immersed in recent months in a spiral of violent demonstrations and the US and China going at it hammer and tongs over trade, last week was a really, really bad time to mount a bid. Even as a spoiler to the LSEG’s in-play bid for Refinitiv.

LSEG shareholders will be asked to approve the US$27 billion Refinitiv deal in November, incidentally, with a view to hitting a scheduled close in the second half of next year. For transparency’s sake, I worked in the Financial and Risk division of Thomson Reuters, which subsequently became Refinitiv, between 2008 and 2017.

So Li failed at the first hurdle. The LSEG board took just two days to roundly reject his proposal, clearly not buying what he believes is an ambitious and far-reaching deal that could have a transformative effect on global financial markets, not least with its 18 hours of continuous trading.

As has been widely discussed, the rejection is not a question of timing, though, nor even about HKEX trying to put the kibosh on the LSEG/Refinitiv deal. The deal-breaker is the Hong Kong government’s hold over HKEX and its board.

Even more, it’s about anxiety over China owning strategically-important critical financial infrastructure in the UK and fears about data and information security. I don’t think anyone, probably not even Li, really thought the deal had a cat’s chance in hell of making it through the regulatory process.

Li’s comments that HKEX is not a Chinese company but a global company (by dint of its ownership of the London Metal Exchange) came across as somewhat ridiculous. One talking head on business TV said that for HKEX, doing a deal with LSE was an existential matter of staying globally relevant and halting creeping marginalisation by Shanghai and Shenzhen.

The putdown of the bid was severe in places. Not only would a deal with HKEX be a significant backward step in the eyes of the LSEG. It wouldn’t offer the best long-term positioning in Asia either. Or even be the best listing/trading platform for China. The Hong Kong Stock Exchange collaborates with the Shanghai and Shenzhen stock exchanges in the Stock Connect mutual access channel for equity trading, but London has its own arrangement via Shanghai-London Stock Connect to access China’s onshore market.

HKEX said it is “disappointed that LSEG has declined to properly engage” as it wanted to demonstrate why it believes that the benefits of its proposal significantly outweigh those of the proposed acquisition of Refinitiv.

On this specific point, if the major fear about the deal was the (currently) silent hand of China on the tiller of the HKEX and unspoken notions of aversion to autocratic Chinese control over sensitive Western data and information, then the LSEG board’s total lack of shareholder consultation and a sweeping rejection in just two days were hardly a ringing display of democracy in action.

HKEX has not given up and says it will seek to solicit support from LSEG shareholders. But even on the basis that political issues could be overcome, attempts to push London into a vertical stock exchange merger have come to nothing over the years – think several Deutsche Boerse attempts and approaches by Nasdaq, Sweden’s OM Group and the Toronto Stock Exchange. I doubt you could even get odds.

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