FRANKFURT/LONDON Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange Group (LSE.L) are counting on lessons learned from past missteps and behind-the-scenes talks with politicians to make sure there are no barriers to finally creating a giant European trading house.
When the pair confirmed their plans for a "merger of equals" on Tuesday, people working on it rushed out assurances that they had already done much of the work to ensure the two national exchanges get the regulatory and political approval they need.
"Governments have been consulted, if there had been a major roadblock we would not have progressed it this far," said one source familiar with the negotiations, adding that talks with politicians and regulators had taken place both before and just after the news.
The EU Commission has to approve the deal as well as regulators in Britain and in the German state of Hesse that controls the Frankfurt stock exchange. It will also need support from the respective countries' governments given the exchanges' importance to their financial markets.
So far German politicians have signaled support for the deal, while officials at Britain's Treasury have not commented. A spokesman for LSE declined to comment for this story and a spokesman for Deutsche Boerse was not available for comment.
Some details on politically sensitive matters such as who would head a combined group have already been tentatively worked out, according to people familiar with the matter, while company sources say they are confident they can win approval from the European Union's Competition Commission.
"The companies are aiming for unconditional EU approval because they see few overlaps which will worry regulators," one of the people said.
Commission spokesman Ricardo Cardoso declined to comment on the matter.
Most investors are optimistic, despite the pair's two failed merger attempts with each other in 2000 and 2004/2005 and Deutsche Boerse's failed 2011-2012 tie-up with NYSE Euronext that was blocked on competition concerns.
LSE shares are up around 15 percent since Reuters reported the deal, with many of its shareholders believing chief executive Xavier Rolet will succeed in his quest.
"People like Xavier are very astute. There's no way he would have taken this so far - and the impression is that they have gone quite far - if he believed the regulator was just going to say 'forget it'," said Trevor Green, head of UK equities at Aviva Investors, LSE's 14th-biggest shareholder.
There are some well-founded reasons for the optimism. The NYSE Euronext-Deutsche Boerse attempted merger was blocked on competition grounds but there are fewer areas the two European exchanges compete directly on.
Deutsche Boerse is a power in derivatives and foreign exchange, while the LSE's MTS unit is strong in bond trading. Both companies' equities trading is mostly domestic.
However, authorities are likely to look at possible anti-trust issues in clearing, settlement and market data, a German regulator and analysts said. Company officials also say that the deal is unlikely to be simply waved through.
The European Commission is expected to conduct an extended antitrust probe, with approval not expected before 2017, people familiar with the situation said, likely focusing on their clearing, settlement and trading data businesses.
Both companies are vertically integrated, meaning they offer all the services banks or fund managers need to trade a particular asset including market data, trading platforms, a settlement service and clearing houses.
"The question is, does vertically integrated foreclose competitors in those markets?" an antitrust lawyer familiar with the matter asked.
Deutsche Boerse's main adviser on the deal is Andrew Bednar of Perella Weinberg Partners who led the talks for NYSE on its ill-fated attempted merger with the German bourse in 2011-2012.
Many asset managers who use the two bourses are expected to come out in support of the deal as a combination of the two clearing houses, which ensure completion of a trade, would make it easier for them to offset their derivatives positions against each other, meaning they could post less cash as collateral to back their transactions.
However a European funds official, speaking on condition of anonymity, said some are worried that the tie-up would decrease their choice of clearing venue and dampen innovation.
There is also a concern that the combined exchange could raise trading and market data fees to recover merger costs, the official added.
Deutsche Boerse Chief Executive Carsten Kengeter stressed the benefits of a deal when he met the economy minister for the German state of Hesse on Wednesday.
"I would never have begun these talks if I were not convinced that it would have a positive impact on the economy for which we are both responsible," Kengeter told Tarek Al-Wazir, whose ministry controls the state's stock exchange supervisor.
Al-Wazir said his office would closely review any merger application if and when it is received. Deutsche Boerse has until March 22 to decide if it will pursue a deal with the LSE under UK takeover rules, though that can be extended by mutual consent.
(Reporting by Andreas Kroener, Jonathan Gould and Ludwig Burger in Frankfurt, Rene Wagner and Gernot Heller, Noah Barkin in Berlin, Foo Yun Chee in Brussels, Anjuli Davies, Sinead Cruise and Huw Jones in London; Writing by Jonathan Gould and Rachel Armstrong; editing by Anna Willard)
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Updated Date: Feb 26, 2016 00:45 AM