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LSE bid shows HKEX’s limitations

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By Jonathan Breen
17 Sep 2019

The Hong Kong Exchanges and Clearing’s (HKEX’s) proposition to acquire the London Stock Exchange Group last week was nothing short of bewildering. Instead of showcasing the HKEX’s ambition with such a bid, the move has only served as an embarrassing reminder of the bourse’s shortfalls.

HKEX chief executive Charles Li turned heads last Wednesday with an unsolicited bid of around £32bn ($39.9bn) for London’s stock exchange (LSE), claiming that such a tie-up would “redefine capital markets for decades to come” by bringing East and West closer together.

The bid was audacious and came as a complete surprise to most in the market. But the LSE was having none of it, emphatically rejecting the proposal last Friday. It did not mince words in its statement, saying the proposal had “fundamental flaws” and that it saw “no merit in further engagement” with the HKEX.

A lot was wrong with HKEX’s plan, including its demand that the LSE scrap a planned multi-billion dollar acquisition of data provider Refinitiv, previously owned by Thomson Reuters. The LSE has made clear that it would not shelf that purchase.

But what really stands out is the timing, and the HKEX’s lack of focus on corporate governance within the bourse — key given the turbulent political climate in the special administrative region (SAR) as pro-democracy protests enter its fourth month.

The idea that the LSE would surrender control to a group heavily influenced by a government with increasingly opaque links with China is simply far-fetched. Hong Kong SAR’s government effectively has majority control over the HKEX and elects half of its board of directors. At any other time, this may not have been an issue, but Beijing’s encroachment on Hong Kong’s ostensibly independent institutions is becoming a major issue for the market.

There are other big problems brewing at home too.

Credit ratings agency Moody’s changed its outlook on Hong Kong’s Aa2 rating to negative from stable on Monday as violent protests continue and the economy slumps. This came just about a week after Fitch downgraded Hong Kong’s rating to AA from AA+ with a negative outlook on September 6.

It certainly seems wise to deal with Hong Kong’s economic fundamentals first. 

Maybe the HKEX’s board think that by creating a multinational tie-up between markets in the East and West, they are helping fix a problem by bringing together the strengths of two stock exchanges to create a global trading powerhouse.

Surely, that would be a boost to Hong Kong’s economic stress?

That thinking is logical given the circumstances. Hong Kong has already exhausted its connections with China’s stock exchanges, thanks to the Shanghai and Shenzhen stock and bond connects, leaving few other options to milk the huge business potential in the Mainland.

But that is also exactly why the LSE has scorned the HKEX. In a letter to the Hong Kong bourse, the LSE pointed to the opportunities available in China — not Hong Kong.

“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 mutually beneficial partnership with the Shanghai Stock Exchange which is our preferred and direct channel to access the many opportunities with China,” said the LSE.

That scathing comment would have hurt. But the HKEX is not giving up. Its response to LSE was to double-down — saying it is determined that LSE’s shareholders should be given the chance to review both the Refinitiv and HKEX transactions and that it will continue to engage with them in the meantime.

Its efforts will likely be in vain as such as such transnational tie-ups between exchanges are highly likely to be vetoed by anti-trust or competition commissions. Mergers with the LSE have been tried before. Deutsche Börse came close in March 2017, but the plan was blocked by the European Commission. Any HKEX–LSE link will also be scrutinised very carefully.

HKEX should, of course, be given some credit for trying to pull off what would have been a truly landmark M&A deal. But as things stand, its proposal leaves a lot to be desired.

By Jonathan Breen
17 Sep 2019