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Hong Kong Stock Exchange Offers to Buy Its London Counterpart A Hong Kong-London Stock Exchange Bid Ties 2 Cities in Turmoil
(about 7 hours later)
HONG KONG — The owner of the Hong Kong Stock Exchange said on Wednesday that it had offered $36.6 billion to buy the London Stock Exchange, making a bid to create a global trading giant that would combine a European institution with fast-growing Asian economies. HONG KONG — Stock exchanges are potent national symbols of capitalistic clout, and a surprise offer on Wednesday by Hong Kong’s exchange to acquire its London competitor is likely to set off a transcontinental tug of war.
A deal is far from assured, however. It depends on the London exchange abandoning its own deal, struck just weeks ago, to buy a data company called Refinitiv. On Wednesday, the London exchange said that it would consider the unsolicited offer from Hong Kong but that it remained committed to completing the deal for Refinitiv. If it came to fruition, the Hong Kong Stock Exchange’s unsolicited $36.6 billion bid for the London Stock Exchange would create a market juggernaut, pairing the pre-eminent exchanges in Europe and Asia and creating an emboldened rival to challenge the leading United States exchanges.
The Hong Kong proposal could face other hurdles as well. British officials, like their counterparts around the world, have put greater scrutiny on deals involving China, of which Hong Kong is a semiautonomous region. Antigovernment demonstrations in Hong Kong this summer have highlighted shifts in the city’s unusual relationship with Beijing and called into question the long-term viability of its reputation for an independent judiciary and as a hub for global business. Hong Kong officials said on Wednesday that fusing the two exchanges would allow companies and investors to profit from a common platform for trading stocks and bonds that would be open 18 hours a day.
Reflecting the uncertainty, the London exchange’s shares surged after the deal was announced before falling below the Hong Kong exchange’s offer price, suggesting that many investors believed a deal would not be completed. But the proposed deal comes at a time of wrenching economic, political and social turmoil in Britain and Hong Kong that is jeopardizing their standings as regional financial hubs.
Executives at Hong Kong Exchanges and Clearing Limited, the company that owns the Hong Kong exchange, dismissed the concerns. Key managers would continue to run the London Stock Exchange, they said, and the offer itself represented an endorsement of London’s future as a global financial hub. In Hong Kong, China’s efforts to assert control over the semiautonomous territory have provoked weeks of angry protests. And in Britain, the government is in turmoil over plans to exit the European Union in a way that could deflate the economy.
They also dismissed concerns that regulators would look skeptically at a deal from a Hong Kong company, citing their company’s successful 2012 purchase of the London Metal Exchange. The Hong Kong offer would require Britain to cede a corporate crown jewel — one whose roots trace back to 1571 — at a time when London’s centuries-long status as a leading financial capital is already in doubt because of Brexit.
“We are not a Chinese company, and we are not even a simple Hong Kong company,” Charles Li, chief executive of Hong Kong Exchanges, said in a conference call with reporters. “We are a global company.” Britain has been more open to investment from China and Hong Kong than other Western countries have. Li Ka-shing, the Hong Kong tycoon, has invested in British infrastructure for years, and London has been slow to bend to Washington’s pressure not to use equipment from Huawei, the Chinese maker of telecom gear. But the Hong Kong protests have brought questions of Chinese influence to the fore.
Both the Hong Kong and the London exchanges have sought merger partners to deal with a rapidly shifting world for the trading of stocks, bonds and other securities. The rise of new electronic trading platforms and methods have forced them to cross borders to better appeal to companies that no longer necessarily see one country as their home. The Chinese government is the largest shareholder of the Hong Kong exchange, with the right to name six of its 13 board members, and Beijing’s responses to the antigovernment demonstrations in Hong Kong are likely to lead British officials to closely scrutinize the deal for any signs of Chinese government influence. Britain’s business minister, Andrea Leadsom, said in a Bloomberg Television interview on Wednesday that regulators would “look very carefully at anything that had security implications for the U.K.”
Stock exchange executives have been trying to persuade foreign companies to pick overseas exchanges as their primary markets. American executives regularly travel to Asia to try to persuade fast-growing private companies to list their shares in the United States, rather than Hong Kong or Tokyo. Previous foreign takeovers of British companies have been derailed or delayed on similar grounds, such as a proposed takeover last year of Northern Aerospace by a Chinese rival. The British government announced plans last year to significantly toughen its scrutiny of foreign takeovers, with a particular eye on those coming from China.
Hong Kong’s proposed takeover is the latest piece of a decade-long rush toward consolidation of stock exchanges around the world, as they try to fend off both upstart competitors and new technology that threatens traditional market exchanges with obsolescence.
Both the Hong Kong and the London exchanges have sought merger partners. They and others are crossing borders to better appeal to companies that no longer necessarily see one country as their home. American executives, for example, regularly travel to Asia to try to persuade fast-growing private companies to list their shares in the United States, rather than Hong Kong or Tokyo.
Stock exchanges have been transformed as a result. In the United States, both the New York Stock Exchange and the Nasdaq Stock Market are now part of broader, more global companies.Stock exchanges have been transformed as a result. In the United States, both the New York Stock Exchange and the Nasdaq Stock Market are now part of broader, more global companies.
The London exchange has tried to do the same. Two years ago, European antitrust regulators blocked it from merging with Deutsche Börse Group, a deal which would have created a major market operator across Europe. It also tried to combine with the Toronto Stock Exchange nearly a decade ago. The London Stock Exchange Group in particular has been the object of desire for other exchanges: Deutsche Börse and the Toronto Stock Exchange have both tried and failed at takeovers in the past decade.
Its appetite for a deal with the Hong Kong exchange is not clear, however. The Refinitiv proposal represented the London exchange’s own major bet on how to navigate shifting financial markets. Market data has emerged as a potential area of growth. The deal with Refinitiv would be a $27 billion transaction, including debt, and could make the exchange too big and difficult for a suitor like the Hong Kong exchange to buy. Trying to bolster its standing as an independent company, the London exchange last month agreed to buy the data provider Refinitiv for $27 billion. That pending deal makes the Hong Kong bid even more of a long shot because it would make the London Stock Exchange bigger than its Asian rival.
Mr. Li and other Hong Kong exchange executives said the Refinitiv deal had galvanized them to act. “We know we were late,” Mr. Li said, “and we don’t want to be late again.” The Hong Kong company’s takeover interest caught the management of the London Stock Exchange by surprise.
The Hong Kong exchange is making its offer at a turbulent time. It has long prospered from Hong Kong’s traditional status as a gateway between mainland China and the rest of the world. Many big state-run Chinese companies have listed there, and global investors have flocked to Hong Kong to buy shares of fast-growing Chinese companies like Tencent, the powerful internet conglomerate. Executives at the two exchanges met on Monday in what British executives figured would be a casual discussion about the state of their industry, according to people with knowledge of the matter.
Those ties have begun to be a burden, however. The trade war between the United States and China has contributed to a slowdown in trading on Hong Kong’s exchange. Instead, the Hong Kong officials declared that they wanted to buy the London exchange for nearly $37 billion.
In the longer term, the exchange and other Hong Kong companies face difficult questions about their future. Less than 48 hours later, the Hong Kong company made its offer public, hoping to cause a swell of support for the deal from the London Stock Exchange’s shareholders.
Hong Kong is Chinese territory but operates under its own laws, which international businesses and investors find attractive compared with conditions on the mainland, where the courts are undependable and controlled by Beijing. But the recent mass protests, fueled in part by a more assertive hand from Beijing in Hong Kong affairs, have raised questions about how long that arrangement can last. On Friday, Fitch Ratings, the credit rating firm, downgraded its outlook on Hong Kong, saying the unrest had tested the city’s capacity to remain distinct. Under the terms of the offer, the Hong Kong company would pay cash and stock worth about 8,361 pence per share as of Sept. 10’s stock prices, a 23 percent premium to where the London exchange’s company had been trading.
On Wednesday, Mr. Li rejected the idea that the Hong Kong exchange would want to loosen its ties to the mainland. He noted London’s ambition to become a global center for trading in the renminbi, the Chinese currency, and said the Hong Kong exchange could help fulfill that. Beijing heavily restricts the currency from crossing its borders, but some Chinese officials have openly discussed a day when the world might use the renminbi as commonly as they use the American dollar, which would give China greater say in the global financial system. Should London become a hub for renminbi use, more Chinese companies and investors would consider the city an even more attractive place to do business. British takeover rules now say that the Hong Kong exchange has 28 days to either make a firm acquisition offer for the London Stock Exchange or walk away.
The Hong Kong exchange’s offer also represents a ringing endorsement of London’s future despite the uncertainty stirred up by Britain’s effort to leave the European Union, which has left many questioning the city’s prospects as a financial hub. For now, it is unclear what will happen. Shares in the London Stock Exchange Group rose 6.6 percent on Wednesday, to 7,254 pence. That remains below the Hong Kong exchange’s offer, suggesting skepticism from the London company’s shareholders that a deal will come to pass.
“We see no reason why any of the temporary difficulties and challenges that everybody is going through should be the obstacle for some great things to happen,” Mr. Li said. The London exchange said in a statement that it would consider the unsolicited offer from its Hong Kong counterpart but remained committed to completing its $27 billion deal to buy Refinitiv. That transaction would thrust the London exchange deeper into the business of selling and managing market data, a business that has grown in prominence and profitability for exchanges.
Under the Hong Kong exchange’s offer, shareholders of the London exchange would receive a mix of cash and stock that would value the company at $36.6 billion, roughly 20 percent more than the shares were valued at earlier this week. But proponents of the Hong Kong offer are likely to argue that becoming part of a European-Asian giant is a surer business bet than buying Refinitiv, which has long lagged Bloomberg L.P. in the market data industry.
The Hong Kong exchange said most benefits of the merger would come from fusing technology. The Hong Kong exchange has been looking to bolster its trading systems. In return, the combined company could offer companies and investors a broad, common platform for trading that would be open 18 hours a day. Charles Li, the chief executive of the Hong Kong exchange’s parent company, said on a conference call with the media on Wednesday that the Refinitiv transaction helped push his company to hastily move forward with a bid. “We know we were late,” he said. “We don’t want to be late again.”
The offer comes at a politically turbulent time for both exchanges’ home bases. The British government remains paralyzed by questions about how the country should leave the European Union, while the business community remains in the dark about what Brexit would mean for London’s place on the business world stage.
At the same time, Hong Kong has been torn by mass demonstrations over what protesters see as a more assertive hand by Beijing in what is meant to be a semiautonomous region of China, operating under its own laws, which international businesses and investors find attractive compared with conditions on the mainland.
On Wednesday, Mr. Li rejected the idea that the Hong Kong exchange would want to loosen its ties to the mainland. He noted London’s ambition to become a global center for trading in the renminbi, the Chinese currency, and said the Hong Kong exchange could help fulfill that. Beijing heavily restricts the currency from crossing its borders, but some Chinese officials have openly discussed a day when the world might use the renminbi as commonly as it uses the American dollar, which would give China greater say in the global financial system. Should London become a hub for renminbi use, more Chinese companies and investors would consider the city an even more attractive place to do business.
Mr. Li dismissed concerns about a China-owned company buying a British icon. He noted that Hong Kong Exchanges and Clearing has owned the London Metal Exchange for seven years, investing in the British platform and keeping it free from Chinese management.
“We are not a Chinese company, and we are not even a simple Hong Kong company,” Mr. Li said. “We are a global company.”