OpinionPolitics, among other concerns, stands in the way of HKEX’s bid for the London Stock Exchange

Stock exchanges trying to stay competitive in the wake of technological advances and structural changes may have profit on their mind, but they should expect regulatory and geopolitical considerations to take precedence

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The London Stock Exchange Group headquarters in London. Photo: Bloomberg

Published: 3:30pm, 13 Sep 2019Updated: 9:26pm, 13 Sep 2019

HKEX’s audacious US$36.6 billion bid for London Stock Exchange Group raised quite a few eyebrows on Wednesday. Three immediate questions were raised. First, does the bid make sense for shareholders on a commercial basis? Second, what are the strategic considerations for Hong Kong and global financial markets? Third, what are the regulatory and geopolitical hurdles?

My policy is never to make any predictions on the prices or viability of any commercial deal but to let facts speak for themselves. At present prices, HKEX is the third-largest listed exchange in the world with a market cap of US$40 billion, larger than the London Stock Exchange (US$31 billion) but smaller than the CME Group (US$79 billion) and the Intercontinental Exchange Inc (ICE, US$53 billion).

The fact that the LSE share price rose slightly after the bid announcement but remained lower than the bid price by HKEX suggested that LSE shareholders are not particularly enthusiastic. On the other hand, the HKEX price fell slightly as the merged institution would have a lower return on equity than the current level of around 24 per cent (15 per cent for LSE).

As part of the team that pushed for demutualisation of HKEX in 1999/2000, when I was at the Securities and Futures Commission of Hong Kong, it may be useful to recall the logic for its consolidation and eventual listing. The objective then was to merge the stock exchange, the futures exchange and the Hong Kong Securities Clearing Company (HKSCC) into a single holding company that would be listed and lead the way to improving the financial technology infrastructure for capital markets in Hong Kong.

In 2012, HKEX acquired the London Metal Exchange (LME) for £1.4 billion (US$2.2 billion in exchange rates then) to strengthen its commodity trading. By attracting mainland company listings, HKEX has been ranked No 1 in global IPO funds raised in six of the past 10 years.