LSE–Deutsche Börse Merger Deal Would Create ‘World’s Largest Index Provider’

The LSE confirmed it is in “detailed discussions” with Deutsche Börse about a potential merger last Tuesday, Feb. 23—the third time that the two exchanges have explored the possibility.

Consolidating the two index giants would create the “largest indexes business in the world, vaulting over S&P Dow Jones Indices and MSCI,” says Chris Porter, of Burton-Taylor International Consulting. While the consultancy doesn’t yet have its 2015 annual analysis of the index industry, both the LSE and Deutsche Börse have been “very upbeat about the performance and potential of their index units,” Porter says. Current Burton-Taylor figures estimate that the total global revenue from indexes businesses in 2015 will be close to $2.5 billion, and the combined indexes revenues of LSE and Deutsche Börse would account for more than $660 million of that. 

Further figures from the Burton-Taylor Exchange Global Share & Segment Sizing 2015 report show the increasing slice of revenue both exchange’s index businesses represent. Deutsche Börse index-specific revenue was $30.9 million in 2010, $36.6 million in 2011, $98 million in 2012, $102.2 million in 2013 (though the exchange changed the way it classifies revenue within that business segment in 2013) and $120.2 million in 2014 which includes Stoxx index revenue within the Deutsche Börse Market Data + Services segment, including Stoxx and DAX index-related business.

The same report shows a significant jump in index-specific revenue for the LSE in 2012, following the purchase of the 50 percent of the FTSE Index business that it did not already own from Pearson in 2011 (from $81.1 million in 2011 to $212.5 million in 2012). Revenues continued to increase to $272 in 2013 and $324.4 million in 2014 as the group continued to focus on benchmarks and indexes.

Indeed, when the LSE sold its Proquote terminal business to Australian vendor Iress last September, a spokesperson for the exchange told IMD that the sale fitted its diversification strategy for the group. In the past, the spokesperson said, there was a greater focus on the capital markets side of the LSE’s business—specifically, the listing and then the trading of equities—which is now a much smaller slice of overall LSE revenues, whereas the rest of its information services business was becoming more pivotal. With the Russell acquisition in 2014, and acquiring the remaining 50 percent of FTSE, it is clear the group has been focusing more on the benchmarking and indexing side of the information services division for some time, an LSE spokespersion says.

Steve Ellenberg, senior consultant for professional services at inventory management software vendor MDSL, says that while a merger would create a “huge index organization,” it would  be unlikely to deliver any major structural changes or changes in polices and relationship management style. “Both are sophisticated operations, [and] both have good account management in place, with good coverage in Europe as well as the US. I don’t see many changes,” he says. 

Under the merger proposal, the LSE would retain separate branding, so the merger is more likely intended to consolidate technology platforms and reduce overheads, rather than create one large, single stock exchange, says Paul Pickup, director of Trading Technology, a specialist exchange technology consultancy.

In addition to branding, Ellenberg says he “wouldn’t be surprised” if the exchanges also kept separate sales teams for their index businesses. “Is the same person going to sell licenses for Deutsche Börse and FTSE indexes? I don’t think so. They’re very complementary, there’s not a lot of overlap. FTSE is great in the UK, and Deutsche Börse in certain areas of Europe, and Stoxx covers the rest. And they’re fairly focused—they’re not global indexes. I don’t believe they’re thinking there will be a lot of savings coming from consolidation,” he says.

From a data licensing and administration perspective, consolidating the two index businesses would be a relatively smooth ride, says Reg Pritchard, managing director and owner of data contracts consultancy Rights Management Associates. “Both these exchange groups have the flexibility within existing contracts to align their policies. Deutsche Börse in particular has a very experienced and capable market data management team, and has already assimilated data products from Ireland to India under a standard set of contracts and policies,” he says.

However, Pickup notes that Deutsche Börse’s 2012 bid for NYSE Euronext fell through after failing to win regulatory approval from the European Commission, adding that this may yet happen in this case, too. “The EC may come along and say the LSE Group supports the British and the Italian markets, Deutsche Börse support the German, Austrian, Irish and some Eastern European markets. They might not want too much consolidation; [which] would be a bad thing from a competitive point of view,” he says.