Stock exchange merger frenzy shocks markets

Deutsche Börse and NYSE Euronext, the world's second and third biggest exchanges by revenue, have revealed they are in "advanced merger talks", shocking the markets and dramatically upstaging confirmation that the London Stock Exchange is to take over TMX Group, Canada's largest exchange.

The proposed German-US deal will create the world's second most valuable stock exchange group with a combined worth of about $24bn (£15bn), as well as the largest operator by revenues and profits. By contrast, the combined market capitalisation of LSE and TMX is $6.9bn.

Andrew Mitchell, an analyst with Charles Stanley Securities, predicted the deals signalled a new wave of consolidation in the sector. He described the Deutsche/NYSE tie-up as "a much more substantial beast," and added: "The consensus is that we will end up with a handful of global exchanges."

Wall Street sources said they had been expecting a move by the LSE, but were surprised that Deutsche Börse and NYSE Euronext had decided to join the merger fray. "Everyone's been expecting some consolidation. LSE had to make a move and this seems like a decent one," said one source close to the exchanges. "But it's hard to see what triggered NYSE and Deutsche – it seems very reactive. They may have difficulty getting that passed by European regulators."

Deutsche Börse shareholders will hold around 60% of the enlarged group, with their NYSE Euronext counterparts left with the remainder, assuming the deal goes through. The combined group would have dual headquarters in New York and Frankfurt with Deutsche Börse's chief executive, Reto Francioni, becoming chairman, while NYSE Euronext boss Duncan Niederauer is likely to be the new company's chief executive.

Similarly, the tie-up between LSE and TMX – whose shareholders will own 55% and 45% of their new entity respectively – will also result in joint headquarters and a 15-person board split eight-seven in favour of LSE executives. Some market watchers suggested the rather awkward structure, as well as the companies' frequent insistence that the deal was a "merger of equals", was an early effort to appease Canada's notoriously tricky regulators.

In Ottawa, Tony Clement, Canada's minister for industry, who blocked last year's proposed takeover of Canadian fertiliser group Potash Corp by mining group BHP Billiton, said: "My officials will be reviewing the situation. They will in turn brief me as to whether they feel this is reviewable under the Investment Canada Act and at that time I will make that situation public."

Irrespective of how each deal plays out, it now seems certain that the stock exchange sector has re-entered one of its frequent periods of merger speculation. Phil Dobbin, an analyst at brokers Shore Capital, said: "The whole sector is fragmented globally. This is not the end of the process. The LSE has been targeted previously. Now it is a participator." Others suggested that the next targets would be in Asia, where the Bombay Stock Exchange, the venue of the second highest number of listings after the LSE, and the Korea Exchange, the number two in small business listings, are obvious targets.

However, the sector has suffered from a mixed record in consummating tie-ups. Previous talks between Deutsche Börse and NYSE Euronext over a merger failed in 2008, partly on concerns over possible resistance from US authorities to a takeover of NYSE. Meanwhile, at various times in the past decade, the LSE has been seen a potential partner for both Deutsche Börse and Euronext, while four years ago US technology-focused exchange Nasdaq unsuccessfully pursued its London rival.

The rationale for such mergers centres around exchanges being able to offer products and services to a wider pool of customers, as well as saving costs. The LSE and TMX tie-up, which would create a platform with the world's largest number of mining company listings at a time of surging commodity prices, predicts it will increase revenues by £35m in its third year, growing to £100m by year five. Cost savings are hoped to total £35m by the end of the second year of the enlarged company's existence.

Deutsche and NYSE also expect to make around €300m (£255m) of cost savings if their deal goes through.