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Hong Kong Stock Exchange Drops LSE Bid. Turns Focus to Asian Markets

Hong Kong Exchanges & Clearing Ltd. said it won’t proceed with its 29.6 billion-pound ($36.4 billion) unsolicited takeover bid for London Stock Exchange Group Plc, another failed cross-border deal in the exchange sector that ends the Asian bourse’s ambitions to be a link between Europe and China.

The decision is a rare setback for HKEX Chief Executive Officer Charles Li, who had a vision of London at the center of trading between East and West — with the help of Hong Kong. Instead, Li said Tuesday that the “vision for the business looking forward is to build upon the role we already play in Hong Kong, China, Asia and more widely.”

Before Tuesday’s about-face, the region’s largest exchange by revenue had been attempting to regain momentum after last month’s stinging rebuke from LSE’s board. HKEX executives met LSE shareholders in London and New York to try to gain their backing for the takeover plan. The bourse also was in talks to borrow as much as 8 billion pounds to fund the purchase.

While the HKEX’s board continues to see a combination as “strategically compelling,” it’s “disappointed that it has been unable to engage with the management of LSEG in realizing this vision, and as a consequence has decided it is not in the best interests of HKEX shareholders to pursue this proposal,” the exchange said in a filing on Tuesday.

HKEX rose 2.8% to HK$232.40 as of 10:33 a.m. The benchmark Hang Seng Index gained 0.9%.

With the takeover offer pulled, “HKEX should resume its focus on strategic initiatives linking mainland China’s capital markets with Hong Kong,” Bloomberg Intelligence analyst Sharnie Wong said in a research report Tuesday morning.

Li’s LSE counterpart, David Schwimmer, has said he preferred direct access to China and didn’t need the former British colony as a conduit. LSE last month rejected HKEX’s initial takeover proposal, citing complications ranging from political unrest in Hong Kong to potential problems with regulators.

HKEX countered with a charm offensive, bringing in UBS Group AG and HSBC Holdings Plc to try to persuade shareholders of the merits of its proposal, Bloomberg reported.

Key Speakers and Interviews at the Bloomberg New Economy Forum
Charles Li CEO of HKEX [Photo:Bloomberg]

“The whole offer was a farce,” Christopher Cheung, a Hong Kong lawmaker and HKEX shareholder, said in phone interview. “When HKEX announced the offer, I thought they’ve already had discussions with London Stock Exchange and their regulators. It turns out they have not. HKEX now must address the danger of stagnant business growth.”

LSE investors are due to vote on the exchange’s own $27 billion deal for data provider Refinitiv before the end of the year. Any further pursuit by HKEX would depend on LSE abandoning that plan. Under U.K. takeover rules, HKEX has until Oct. 9 to make a formal offer or walk away for at least six months.

“Should the Refinitiv deal unexpectedly fall, HKEX could come back as the only option to LSE,” said Chi Man Wong of China Galaxy Securities Co., the only analyst who recommended investors reduce their HKEX stakes after the bid was announced. “Even if the deal goes through, HKEX still could look out for other options. But it should wait until a major breakthrough in trade talks to avoid a hostile M&A environment in Europe and the U.S.”

Exchange companies have tried and failed to combine in recent years, as political, regulatory and economic considerations have foiled the efforts. LSE’s attempted merger with Germany’s Deutsche Boerse AG was ultimately abandoned, and Singapore Exchange Ltd.’s bid for ASX Ltd. was rejected by Australian regulators in 2011 because of national interest concerns.

Consolidation Predicted

Despite the fumbles, analysts and observers have long predicted that the global exchange sector will consolidate. And there have been successful deals, including HKEX’s acquisition of the London Metal Exchange and Intercontinental Exchange Inc.’s purchase of the New York Stock Exchange.

“The complicated regulatory, technical and technological landscape in which we operate means we are resolutely focused on our ambitions, whilst also maintaining flexibility in our approach,” Li said in a blog post Tuesday.

HKEX knows “some things we try will not develop at the speed which we would like, or in some cases, at all,” Li said. “Our goal is to keep moving forward, reinforcing HKEX’s role and building Hong Kong’s strength as a financial market.”

— Source: Bloomberg