Merger of sequels

LSE/TMX: Get real. Contrary to the breathless assertions of the London Stock Exchange and Toronto peer TMX, their engagement presages one of the less exciting marriages this year. It is a sensible combination as far as it goes — but the modest upside is countered by worries that fudge will replace talk about a merger of equals.

There are some plausible cost savings to be had, totalling about 35 million pounds by the end of the second year. Revenue synergies are put at 100 million pounds by the end of year five, mainly from attracting more listings than the exchanges would have done as separate entities — especially in the hot area of natural resources.

Together, these could have a present value of around 740 million pounds, or about 17 percent of the combined market capitalisation of the two companies before the deal’s announcement. But revenue synergies are difficult to tie down and there is a risk of net shrinkage if non-resources companies view the LSE-TMX as no more than a specialist venue. LSE's value added a cautious 220 million pounds on February 9. Though a somewhat underwhelming transaction, the LSE has the better side of the deal. Chief executive Xavier Rolet keeps his title on an LSE-dominated board.

The LSE remains the holding company, implying a lead role for the UK regulator. In return, the TMX gets a smidgen of a premium, owning 45 per cent of the combined group when perhaps a percentage point less would have been justifiable on a pedantic assessment of recent market values. TMX is ceding control for almost nothing; it looks vulnerable to a counterbid.

The new company’s larger balance sheet will give it the strength to make acquisitions that neither group could consider solo. The deal advances the LSE’s ambitions in derivatives.

A bigger LSE will also help make it easier for some of its bigger shareholders — such as Borse Dubai and Qatar Investment Authority — to sell down their stakes in the market.

But the chairman, TMX’s Wayne Fox, has his work cut out providing effective oversight when he will be outnumbered by LSE folk. Rolet is ambitious. He needs a robust board to keep him in check. Perhaps fortunately, the company won’t be so big as to be bid proof if things don’t work out.