The European Commission has formally blocked the proposed merger between The London Stock Exchange Group plc (LNSTY) and the Deutsche Boerse AG (DBOEY) Wednesday, saying the €29 billion ($30 billion) tie-up would have created a monopoly in fixed income clearing markets.
"The European economy depends on well-functioning financial markets. That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets." said Competition Commissioner Margrethe Vestager, adding the merger "would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments."
LSE shares surged to the top of the FTSE 100 following the news, however, rising 3.55% to change hands at 3,128.9 pence each after it said it would pay a special dividend linked to the merger and launch a £200 million share buyback, "an amount broadly equivalent to the return it would have made had the merger with Deutsche Borse proceeded as planned," the company said.
The LSE also said it would be "actively engaged in exploring selective inorganic and ongoing organic investment in order to drive further growth and will continue to consider opportunities for further capital returns in line with its capital allocation framework."
Deutsche Boerse shares also gained, rising 1.4% in Frankfurt to change hands at €82.57 each.
"The prohibition is a setback for Europe, the Capital Markets Union and the bridge between continental Europe and Great Britain," said Deutsche Boerse supervisory board chairman Joachim Faber. "A rare opportunity to create a global market infrastructure provider based in Europe and to strengthen the global competitiveness of Europe's financial markets has been missed."
Both parties had essentially given up on the merger, which was announced last year, with the LSE saying last last month that demands from competition authorities to sell 60% of its MTS government bond trading platform in order to comply with concerns the merger could hamper competition in the region's financial services sector.
That said, the blockage marks the third time the Deutsche Boerse has failed to either buy or combine with the LSE, following unsuccessful attempts in 2000 and 2005. It is also be the sixth time a takeover or a merger with the LSE was undone, either by regulators or shareholders, in the past 16 years.
Last March, the two exchange operators announced the all-stock deal that would be headquartered in London and led by Deutsche Boerse CEO Carsten Kengeter, with shareholders receiving 54% of the combined entity against 45.6% for LSE owners.
Competition concerns are not the only hurdle standing in the merger's way. German criminal authorities announced they were probing Kenetger's share dealings prior to the merger announcement. Frankfurt's public prosecutor is investigating whether share purchases by the CEO in December 2015 were insider trading and if negotiations between the two exchanges had taken place at the time.
The prosecutor said it was looking at discussions between LSE and Deutsche Boerse executive that happened between July and August 2015 and at the beginning of December 2015. Last month, Deutsche Boerse's supervisory board said it "unanimously expresses its full confidence" in the CEO and that no negotiations had taken place in 2015.
There has also been political pressure to stop the merger, with a group of U.K. lawmakers calling on Prime Minister Theresa May to block it.