In a surprising move, Hong Kong stock exchange made an unsolicited offer to buy the London Stock Exchange Group (LSEG). The purchase of this very strategic institution by the former British colonial outpost would have been a very symbolic landmark of the growing influence of Asia worldwide. Nevertheless, History is not so simple and the bid was quickly rejected.
September 11 – No warm welcome for the unsolicited bid
The Hong Kong Exchanges and Clearing, that runs the Hong Kong Stock Exchange (HKEX) makes an indicative public offer to pay £83.61 per London Stock Exchange Group (LSEG) share in cash and stock for the London bourse operator, valuing it at £29.6 billion (USD 36.6 billion), in an attempt to take over its powerful British counterpart. “The Board of HKEX believes a proposed combination with LSEG represents a highly compelling strategic opportunity to create a global market infrastructure leader” affirms the HKEX in a note released that day.
The announcement comes as a total surprise. The London Stock Exchange leaders politely let know via a communiqué that they will “consider the offer”. The CEO of LSEG appears troubled as the public announcement of the bid comes only two days after the HKEX sent its letter of intent to the LSEG board members.
Two things can help to understand the timing of this bid. First, the LSEG trying to acquire the company Refinitiv, a global provider of financial information, data and analytics. As announced at the beginning of August 2019, LSEG made a USD 27 billion offer to the company – currently detained by Blackrock and Thomson Reuters. This acquisition would allow LSEG to compete with the American company Bloomberg, on the very challenging market of financial data and expertise. In search of diversification, LSEG is said to be very attached to this deal. However, LSE and Refinitiv “would be too large for HKEX to consider. Thus, one condition is set to make the bid successful: the London Stock Exchange Group (LSEG), that operates the London market place, would have to drop its project of acquiring Refinitiv » according to a research note of Citic quoted by the South China Morning Post.
Second, LSEG is seeking for a long time to strengthen its presence in Asia and has recently established links with the Shanghai Stock Exchange, Hong Kong market place’s main rival.
September 13 – LSEG sees “no merit in further engagement”
The time took to consider the offer was short: two days after the HKEX announcement, the LSEG Board Members unanimously decide to turn down this proposal. The Board spells out its concern in both a letter and a website post pointing out “fundamental flaws” of the plan, which included current political crises engulfing the city. In a strongly worded letter addressed to the chairman and CEO of Hong Kong Exchanges and Clearing, LSEG chairman, makes very clear his preference for Shanghai over Hong Kong as strategic partner. “We do not believe HKEX provides us with the best long-term positioning in Asia or the best listing/trading platform for China. We value our mutual beneficial partnership with the Shanghai Stock Exchange which is our preferred and direct channel to access the many opportunities with China”.
A statement posted on the LSEG website that day raises the concerns regarding the proposal: “The board has fundamental concerns about the key aspects of the conditional proposal: strategy, deliverability, form of consideration and value. Accordingly, the Board unanimously rejects the conditional proposal and, given its fundamental flaws, sees no merit in further engagement.”
September 14 – “Hong Kong can’t make it alone”, the Chinese Communist Party says
The LSEG turning down HKEX offer with the aim of strengthening partnership with Shanghai Stock Exchange appears as a victory for the Chinese Communist Party (CCP). In a statement published on mainland China People’s Daily, a CCP’s spokesperson says that getting access to future opportunities in China depended on how well Hong Kong consistently aligned with the country’s interests. “Can Hong Kong do this? With ongoing violence and calls for independence, external markets will have worries [about Hong Kong],” the commentary says, arguing that the London operator’s comments reflects the thinking of the foreign investment community.
However, the statement also highlights Hong Kong’s importance as an offshore yuan trading hub, its rule of law, its role as a risk and wealth management center and its place as one of the freest economies in the world meant it was irreplaceable for China.
Several investment banks, including the French Natixis begin to consider the growing influence of Beijing on Hong Kong as of caution. In a note, the bank stated that “Hong Kong had evolved from a broad-based international financial center to a mainland China-dominated offshore center. […] The longer the political crisis remains unsolved, the more adverse its effect it will have on Hong Kong. And the grip of such turbulence could also spill over to mainland China, at least in the sectors which are heavily dependent on Hong Kong as a source of capital.”
Is that really a smart move to favor Hong Kong instead of Shanghai when all seems to indicate that an irreversible shift is occurring, the economic and financial weight gradually transferring from Hong Kong to Shanghai?
To conclude – Uncertain future for both London and Hong Kong stock exchanges, says former LSEG CEO
Xavier Rolet, a French banker former CEO of the LSEG (2009-2017) confirms this hypothesis and shares an interesting viewpoint regarding this deal and the future of stock markets worldwide. According to him, “the financial industry is going to merge into three, or even two actors, one being Wall Street and the other one, the Shanghai Stock Exchange. » He adds: « After the merger between LSE and Deutsche Börse failed, I don’t see any European stock market joining the top 3 leaders in this industry.”
Finally, the symbolic purchase of LSEG by an Asiatic buyer could very well happen in the future but it will most likely be done by another coastal city largely created during the colonial era: Shanghai.