Monday, 16 July 2018

Global aspirations

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After losing out in its attempts to secure a major European partner, Deutsche Boerse has taken a different approach to maintaining its competitive edge amid a consolidating landscape. The acquisition of the ISE has given the exchange a foothold in the lucrative US derivatives market while cooperation agreements are currently addressing its ambitions in the growing Asian markets. So far the strategy has paid off, but competition continues to increase. Helen Bartholomew reports.

In the race for exchange consolidation, Deutsche Boerse's list of failed merger attempts could suggest that the exchange has fallen behind its rivals. A failed bid for the London Stock Exchange in 2000 was repeated in 2004. Its attempts to secure a merger with Euronext suffered the same fate in 2006 as the New York Stock Exchange muscled-in with its winning counter-bid for the pan-European exchange.

But in spite of its numerous failed attempts to secure a strong European partner, the German stock exchange operator enjoyed a year of record profits in 2007 and is preparing for another record year in 2008. The figures suggest that Deutsche Boerse remains in a position of strength in Europe, and that failed merger attempts have so far done little to tarnish its position in an increasingly competitive environment.

"The spotlight in past years on the issue of consolidation in public has masked the fact that the focus is, and will remain on growth. The main emphasis here is on organic, and thus sustained and certain growth," said Deutsche Boerse CEO Reto Francioni, at February's results presentation.

Deutsche Boerse's vertically integrated business model has been instrumental in driving profits. Overall, net profit increased by 36% to €912m for the year with increased volatility and algorithmic trading helping to boost revenues in all areas. Sales revenue on the exchange's electronic platform Xetra were up 38% at €435m, while Eurex saw a 24% increase in activity and a 19% increase in sales revenue, with the number of contracts hitting new record highs of 1.9bn. Equity index products led those gains, as activity increased by 55%.

“2007 was by far the most successful year for Deutsche Boerse. The addition of ISE marked an important step in further strengthening our derivatives business. The strong start to the year for Deutsche Boerse Group paired with the cost guidance in place for 2008, supports our expectation that we will be able to achieve a new record result in 2008," said Francioni.

With the acquisition of the International Securities Exchange (ISE) closing in December 2007, ISE revenues will be reflected in DB's income statements from the first quarter of 2008, providing a solid start to the new record figures that the exchange hopes to report next February.

Deutsche Boerse paid US$2.8bn for the ISE, the second-largest US options market, as part of its attempts to boost its global offering in the derivatives market. The acquisition was agreed shortly after losing out to NYSE in the battle for Euronext, and reflects its need to offer transatlantic derivatives trading to compete with the newly-merged NYSE Euronext, which owns UK-based derivatives market LIFFE.

Through Eurex, in which the German exchange holds an 85% stake (Zurich's SWX holding the remaining 15%), Deutsche Boerse now controls the largest transatlantic derivatives market in the world with combined trading of 2.1bn contracts in 2006 and around 2.7bn for full year 2007.

Although the ISE acquisition was viewed by many as a consolation prize after failing to secure a tie-up with Euronext, Deutsche Boerse's stock price performance suggests otherwise. DB shares have outperformed that of its main global peers, NYSE Euronext and the London Stock Exchange since the acquisition was sealed. While DB stock climbed more than 50% between May 2007 and the beginning of 2008, NYSE saw little gain in spite of its success in securing a European foothold through Euronext.

"Consolidation is not end unto itself, but must create value. Moreover, some recent transactions in our industry show that a successful acquisition does not necessarily mean a successful integration of the company that has been acquired," said Francioni. "As our strategic positioning demonstrates and our success proves, we will not be dependent on a single major transaction in the future. This distinguishes us from our competitors."

Despite the exchange's ambitious growth predictions for the months ahead, 2008 will undoubtedly be a tough year as the landscape becomes increasingly competitive and equity sentiment lies in the doldrums. But exchange operators are typically the winners in a bear market as a switch in sentiment does not necessarily translate to reduced profits. Increased volatility typically corresponds to increased trading activity and higher revenues.

One area where the exchange faces near certain revenue falls is in listing fees, as the European IPO market takes a back seat. In an attempt to mitigate lost listing fees from traditional markets, the exchange is keen to enhance its international presence and continues to monitor the market for possible acquisitions that could add value. "Our focus on organic growth does not exclude any external growth. We continue to be open to, and prepared for all forms of cooperation, including acquisitions that create value. However, as in the past, we will apply strict standards that such steps must create value for shareholders and benefits for our customers," said Francioni.

The buoyant primary market in 2007 ensured a record year for the exchange with 230 new listings across all exchange segments, equating to new issue volume of €7.8bn, equalling 2006 levels. The open market accounted for most of the growth, with 150 new listings compared to 102 in 2006.

But with 2008 set to be a very difficult year for IPO activity, particularly in Europe, the race to secure listings from overseas has never been more important. Historically, Deutsche Boerse has been viewed almost exclusively as a platform for German stocks, and has failed to attract the same sort of international attention as London, to which overseas issuers have flocked – especially to its AIM market – in recent years.

Like the world's other main exchanges, Deutsche Boerse has been aggressively courting Asian companies to win its share of the lucrative cross-border listing business. Last year the exchange completed a series of roadshows across China, marketing the Frankfurt stock exchange as a leading listing platform for a range of sectors, particularly industrials, technology and renewable energy. While the exchange has a dedicated team dealing with Chinese listings, it plans to open an office in Beijing later this year, following in the footsteps of the LSE, NYSE and Nasdaq.

Although the exchange has succeeded in securing its first Chinese listings, so far it has seen little in the way of sizeable business. In July, ZhongDe Waste Technology became the first Chinese company compete an IPO on Germany's main board with its €109m flotation, while Asian Bamboo and Greater China Precision Components raised €95m and €31m respectively. Vtion Technology is the mort recent Chinese issuer to list in Germany, though at €55m, its IPO came in far short of earlier expectations and followed a series of delays. Through 2007, Deutsche Boerse saw seven listings from China and eight companies from Russia and the CIS made their debut on the open market. For 2008, the main goal will be to secure more international listings on the main board.

To reflect the growing internationalisation of the exchange, in February this year, Deutsche Boerse expanded its family of DAX indices adding 11 new China-based indices. The main index, DAXglobal China, tracks the 40 largest and most liquid companies in China while the new suite of products includes 10 sector indices.

The exchange made its first cooperation agreement with China in June 2006 when it signed a MoU with the China Foreign Exchange Trade System & National Interbank Funding Center (CFETS) to enhance cooperation concerning financial market development in the country. Later that year a further cooperation agreement was signed with the China Beijing Equity Exchange to promote Deutsche Boerse as a gateway for Chinese companies to the European capital markets.

The expansion into Asia does not end with China, and Deutsche Boerse has made a series of strategic tie-ups with Asian stock exchanges. February saw the beginning of a joint venture with the Osaka Securities Exchange for the launch of a jointly owned trading platform intended to revitalise the Japanese equity options market. In Early March, the group signed a MoU with Vietnam's Hochiminh Stock Exchange to facilitate the development of securities markets in the two countries and explore bilateral business opportunities. Hochiminh Stock Exchange is the largest exchange in Vietnam with 507 listed securities, including 138 stocks with a total capitalisation of D365,000bn (US$23bn).

A year previously, cooperation agreements were made with the Taiwan Stock Exchange, Taiwan Futures Exchange and Taiwan Depository & Clearing Corporation.

"Competition not only remains tough, it actually gets tougher every day. Thus we are well advised and we remind ourselves on a daily basis that we can't afford to rest on our laurels, but must remain extremely vigilant," said Francioni.

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