PARTIES
Deutsche Boerse AG (DBAG) operates the Frankfurt Stock Exchange (Frankfurter Wertpapier Boerse, FWB). DBAG demutualised in 2001. The main business activities of the DBAG corporate group are: trading services in spot markets (which include listing and trading services); trading services for financial derivatives; the generation and distribution of information products; the provision of securities clearing, custody services and settlement of securities transactions (clearing and settlement); and the development, implementation and operation of IT solutions for financial markets and market participants.
London Stock Exchange plc (LSE) is a Recognised Investment Exchange (RIE) under the Financial Services and Markets Act 2000 (FSMA). LSE demutualised in 2000, and became a listed UK plc in 2001. LSE's main business activities are: trading services in spot markets (which include listing and trading services); the generation and distribution of information products; and the development, implementation and operation of IT solutions for financial markets and market participants. Through a joint venture with Stockholmbörsen, the LSE also operates a small derivatives exchange, EDX London (EDX). The total turnover of the LSE in the financial year ending 31 March 2004 was approximately £250 million.
TRANSACTION
DBAG announced on 13 December 2004 that it was in discussions with the LSE with a view to making a recommended cash acquisition offer for the LSE. Euronext N.V. (Euronext), operator of the French, Dutch, Belgian and Portuguese bourses, made a similar announcement on 20 December 2004. DBAG subsequently released more details by way of a proposed pre-conditional cash offer for the LSE on 27 January 2005. (Elements of this offer will be discussed below.)
DBAG withdrew its 27 January offer on 6 March 2005. At the same time, pursuant to the UK Takeover Code (Code), DBAG also expressly reserved certain rights to make an offer. On 14 March 2005, DBAG further announced that it was considering a possible offer for the LSE in the event that Euronext or another third party announced an offer, or in such other circumstances as permitted by the Code. It also noted that it had left its financing commitments in place.
The proposed transaction was notified to the OFT on 31 January 2005. The OFT's administrative deadline for a decision is 30 March 2005.
JURISDICTION
As a result of this transaction DBAG and LSE will cease to be distinct. The UK turnover of LSE exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
ASSESSMENT
DBAG's proposed bid is one of two competing offers to acquire the LSE; the other is from Euronext. The OFT has considered each proposed offer on its merits. This has necessitated consideration of the prospects for competition in listing, equities trading (on-exchange trading services, clearing and settlement), derivatives trading and information services. In respect of listing, derivatives trading and information services, the OFT has identified no evidence that the merger would substantially lessen competition. The focus of this decision has therefore been on equities trading. Competition to provide on-exchange trading services for equities in the UK (and indeed elsewhere) can be best be described as episodic. Episodes that appear to have prompted a competitive response from an incumbent exchange are characterized by a sufficiently credible threat (e.g., because of a better technology offering, lower prices or customer support) that liquidity might switch from one trading platform to another. Recent competition in the Netherlands among DBAG, the LSE and Euronext is consistent with this conclusion. It may be the case that the prospect of such competition acts as a stimulus to LSE at present, or has the potential to do so in the future. The current importance of DBAG in this regard is uncertain and the potential threat from DBAG may not be unique. However, historic episodes of competition may not be a good guide to evolving competitive dynamics in this sector, so that the OFT considers that the evidence should be assessed with caution. On balance and in light of all of the evidence, the OFT considers that the merger may eliminate important potential competition between the LSE and DBAG in respect of on-exchange trading of equities in the UK.
In relation to clearing, it may well be the case that DBAG's economic interest in lowering overall costs of trading to stimulate an expansion in equities trading, together with related corporate governance provisions, would outweigh any incentive to favour its own clearing capability, Eurex Clearing. However, the evidence is mixed: there is a substantial body of third-party concern; the arguments on incentives are difficult to unravel; and predictions as to the level of clearing fees with or without the merger are hard to make. In these circumstances, the OFT considers there to be a realistic prospect of a substantial lessening of competition in clearing. Further, the proposition that DBAG would have an incentive to foreclose access to clearing services to rival exchanges/trading platforms as a strategic barrier to entry at the equities trading level warrants further investigation.
Third party concerns in relation to settlement appear to the OFT to be largely speculative. While concerns regarding DBAG's incentive to internalise Crest's netting functions have some more grounding (for the reasons identified in relation to clearing above), concerns regarding the interpolation of Clearstream between the existing clearing and settlement levels are not considered to be realistic given the costs involved, the infrastructure re-organisation required, the customer cooperation needed, and the degree of regulatory oversight.
On balance and on the basis of the evidence available to it, the OFT believes that there is a realistic prospect that the anticipated merger would substantially lessen competition in the supply of on-exchange trading services for equities in the UK and in the supply of clearing services for such equity trades.
DECISION
Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom. For the reasons given, the undertakings proposed cannot be accepted in lieu of reference.
The merger is therefore referred to the Competition Commission under section 33(1) of the Act.
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