It was
announced last week that the London Stock Exchange and Deutsch Börse. I
was left rather astonished that the deal was being branded as a ‘merger of
equals’ by both parties, and I couldn’t help but feel a sense of
inquisitiveness with regard to a) It being a good deal for both parties b) it actually being a merger of equals.
It has
emerged that each LSE share currently owned will equate to 0.4421 shares in the
combined group, whilst each Deutsch Börse share will equate to 1 group
share. This is the first sign that this isn’t really a ‘merger of equals’ as
this is evidenced by the statistic LSE will own 45.6% of the combined group
whilst Deutsch Börse shareholders will own 54.4%
(Stafford & Massoudi, 2016). Furthermore, the stock market reaction to the
proposed merger suggests that LSE would be getting a good deal out of the
transaction, as they are significantly less profitable that DB. This is
consistent with Arik & Kutan (2015) find comprehensive evidence
regarding the response of target firms’ stock returns in M&As in twenty emerging
markets, including a number in Eastern Europe. Employing standard event-study
methodology for a sample of 1,648 M&As from 1997 to 2013, they find
significant abnormal returns for target firm stocks in emerging economies
around M&A announcements, suggesting that M&A transactions create value
for the target firm’s shareholders in the short run.
If it is
actually going to be a merger of equals then it is questionable whether the two
firms will successfully integrate. Segil
(2004) suggests that the main reason for M&A failure is the inability to
conjoin the two firms corporate cultures successfully. This could be the case
in the merger as it is common in so called merger of equals that the merging
firms boards clash and there is a significant lack of cohesiveness between them
that enables the projected synergies to be achieved. Take the merger between
the two largest cement producers as an example: the firms predicted cost
savings of 1.4billion euros but in reality the clash of French and German
cultures in the firm appears too significant, and this is illustrated by the
2015 fourth quarter loss of $2.91billion (Akram, 2015); (Revill, 2016).
Source: Ft.com
As illustrates above, the deal will,
however be a good opportunity to create a European exchange which is large
enough to compete on a global scale against the likes of ICE, CME and the Hong
Kong stock exchanges. For this reason I believe the deal is wise for both sets
of shareholders, as the combined portfolio will allow a significant amount of
synergies to be achieved.
Massoudi, A. & Stafford, P. (2016). Deutsche Börse
lines up swoop for LSE. Financial Times. Retrieved 8 May 2016, from http://www.ft.com/cms/s/0/7b77d95c-da33-11e5-a72f-1e7744c66818.html#axzz484TNvU7T
Revill, J. (2016). LafargeHolcim Turns More Bullish on
Cement Demand Despite Hefty Loss. WSJ. Retrieved 8 May 2016, from http://www.wsj.com/articles/lafargeholcim-pushed-to-hefty-loss-by-write-downs-1458197341
Segil,
L. (2004). Measuring the value of partnering. New York: AMACOM.
Akram, I. (2016). LafargeHolcim: Becoming Reality – Part
One. World Cement. Retrieved 8 May 2016, from http://www.worldcement.com/special-reports/03082015/LafargeHolcim-Becoming-Reality-Part-One-256/
Arık, E., & Kutan, A.
(2015). Do Mergers and Acquisitions Create Wealth Effects? Evidence from Twenty
Emerging Markets. Eastern European Economics, 53(6), 529-550. http://dx.doi.org/10.1080/00128775.2015.1099445
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