Predator Becomes Prey

HKEX makes a bid to buy LSE

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What's going on?

The operator of the Hong Kong stock exchange, Hong Kong Exchanges & Clearing (HKEX), launched a surprise $37 billion takeover bid for London Stock Exchange Group (LSE) on Wednesday jeopardizing the latters plan to buy data provider Refinitiv.

What does this mean?

Investors had welcomed LSEs Refinitiv gambit, which would broaden its offering beyond bread-and-butter trade hosting. By adding Refinitivs data collection capabilities, LSE stood to become a serious rival to industry leader Bloomberg.

But now HKEX is looking to create a global trading titan linking the West to investment-hungry China, which this week scrapped limits on foreigners buying Chinese stocks and bonds. The takeover would be HKEXs largest ever, dwarfing its then-record $1.7 billion purchase of the London Metal Exchange in 2012. Combining Londons stocks and metals trading venues could potentially trim operating costs and boost profit if competition authorities approve the deal.

Why should I care?

For markets: Its the politics, stupid.
Running stock exchanges is a volume game, and various operators have been tussling to buy one another for years only for proposed takeovers to fall foul of regulators. LSE had previously planned to merge with Germanys Deutsche Brse, but that fell apart in 2017, partly because the European Union refused to base the continents leading exchange in post-Brexit Britain. Once-bitten investors seem skeptical HKEX will succeed with its bid: while LSEs stock rose on Wednesday, it remained 16% below HKEXs offer price (tweet this).

Zooming out: Its the strategy, stupid.
Companies seek to buy rivals for various reasons. The most common is to expand into new products or locations a.k.a. a horizontal merger. But they might also want to purchase a company further up or down the supply chain a vertical merger. HKEX acquiring LSE would be a classic example of the former, but LSEs Refinitiv purchase would be a bit of both allowing one company to own both the data terminals and the data itself. The coming weeks might reveal which investors prefer…

Originally posted as part of the Finimize daily email.

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