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18 September 2019

HKEx Tucks in to the Main Course

So was the LME just the appetiser? HKEx seems to be coming back now for the main course, with its unsolicited bid for the London Stock Exchange. Will they end up smiling and replete at the high table, or rebuffed like Oliver Twist asking for more?

To start with, there are some big differences between the two deals. Size is probably the most eye-catching, initially; the LME went for £1.4 billion, whereas the (opening?) bid for LSE is around £32 billion. So maybe the one could be described as a dig into the petty cash to get hold of a trophy asset, whereas the other is a far more serious, considered grasp of substantial size. 

Well, perhaps that’s slightly unfair, and I don’t - in any way - mean to belittle the LME. The real difference in the deals comes from another direction. 

The LME is the focal pricing forum for non-ferrous metals; whether the purpose of a trade is hedging or speculation, that holds true. The fact that it is in London is frankly irrelevant, as the market it serves is trans-national. The pre-eminence of London in this business was broadly down to history and the attractiveness of the English legal system. There is nothing implicit in the LME which ties it to the domestic UK economy. So in the end, perhaps one can be indifferent to the ownership.

A stock market, though, is in a different position. Its prime function is to facilitate the raising of capital for commercial ventures, to bring together those who have a business proposal with those who have the capital to be able to finance it. Now I know we have moved on from the nineteenth century; the volume of secondary trading dwarfs the amount of primary capital raising and the investors in the London market are in no way constrained by national boundaries, but this is an important point of difference between the LME and the LSE. The LME rules the roost in metals because its pricing is (almost) universally accepted. But there is a stock exchange in all of the major (and most of the minor, political systems allowing) economies; they are an integral part of the domestic economy, regardless of whether or not they also have a significant international exposure. So it would be wrong simply to extrapolate from the LME purchase to the proposed LSE deal.

Multinationals - owned in one location, trading across many - are a regular feature of the world. So surely if that model works for automobiles, consumer goods, whatever, it could equally work for stock exchanges? Mmm. I’m not sure. Qualitatively, there must be a difference between Japanese, German or Indian ownership of the UK’s car manufacturers, for example, and a foreign ownership of the nation’s capital raising heart? I’m a little uncomfortable saying this, as a proponent of free trade, but instinctively, it feels wrong.

At the moment it’s probably not too difficult a bid to reject. The stock element is too high and the cash element too low. Right now, looking at the political unrest and uncertainty in Hong Kong - with no obvious resolution easily visible - it’s difficult to believe many investors would opt for paper in an entity with significant control (look at the board make-up) by a government of a very different stamp from western free-market democracy over the paper they currently hold in a UK-listed company. (And yes, I do say that notwithstanding the current situation of the UK government.)

But if they’re serious, HKEx will probably come back with a better offer, and if the cash element is good enough, well, then what happens? Cash is king, and everybody has his price, right? How much are they prepared to pay to gain the foothold the LSE would give them into the structure of western economies? And if this bid brings, say, US bidders out of the woodwork, would one’s reaction be the same?             

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