LSE strikes back with £4.3bn TMX merger

The LSE is in talks with Canadian group TMX about a possible merger. It's a start - but is it enough?

by James Taylor
Last Updated: 19 Aug 2013
Criticised for missing the boat during the recent wave of consolidation in its sector, the London Stock Exchange is finally - belatedly, some would say - making a move: it looks to be on the cusp of a £4.3bn merger with Canadian rival TMX. The deal will give the LSE more scale, and more exposure to mining companies (a strong growth area - at least for now). But question marks remain. Is there a big enough upside for investors? And should the LSE actually be looking east, not west?

The consensus seems to be that, as much as anything, this is a defensive move by LSE CEO Xavier ROlet. His predecessor Clara Furse failed to pull off a deal with rival exchanges OMX, Nasdaq or Deutsche Bourse, while missing out on the opportunity to buy UK derivatives platform Liffe (subsequently bought by Euronext). The LSE has also suffered recently from stiffer competition in the form of lower-cost, technology-driven platforms, which have squeezed its margins. So Rolet needed an international deal.

On the face of it, a tie-up with TMX looks attractive. It'll create the world's largest exchange group in terms of the number of companies traded (although only seventh-largest by total value). They also have a common interest in mining stocks: lots of the world's biggest miners are traded on the LSE, while TMX is home to Canada's biggest resource companies - and with commodity prices booming, that's a good place to be. What's more, the two groups reckon they can eke out £100m of cost savings by merging.

However, analysts seem a bit sceptical that it will be possible to strip out that much cost, particularly given how hazy they've been about the specifics. And this focus on miners is not without risk, either: many people feel that there's a bubble developing in commodity prices, and the LSE is now even more exposed if that bubble bursts. The other question is how this fits into the LSE's stated aim to focus its efforts on derivatives, which seem to be the big growth area for exchanges. TMX owns Boston Options Exchange, which operates in this area, but it's quite a tiddler.

In fact, if the LSE is serious about getting back to its former glory, it surely needs to think about getting a proper foothold in the emerging markets of India and the Far East. So if this deal gives it greater clout internationally and thus makes future deals easier, that may turn out to be as important as the short-term upside. Although at least Rolet will never want for maple syrup now.

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