Over the past few weeks Ireland has been at the centre of serious, and at times difficult, negotiations that will have some impact on the future of Europe. There was also a bit of brouhaha about Brexit.
While British politicians were looking for “optionality” on the border question going into the second round of Brexit negotiations Euronext, a pan-European exchange, was looking for “optionality” on the Irish stock exchange once it concluded its €137 million takeover.
It is not a trivial question. The need to protect the independence of the Irish exchange in the interest of its stockbroker members and of Irish-listed companies and funds is what has kept the institution independent for 224 years.
There are questions with the deal that remain unanswered.
The first is to do with the costs of trades. Although the general expectation is that brokers will not pay any more for what is a commercial exchange than for the stock exchange that they owned, there is no certainty on this issue.
One observer said that ISE clients were already paying to use the Deutsche Börse to carry out trades and there is no reason to believe that Euronext will be any more expensive.
Brokers are banking on competition, particularly with London, keeping Euronext in check.
Speaking of which, one imagines the guys and gals at Deutsche Börse are getting a little nervous. Only last year the Irish stock exchange signed a six-year deal to use their trading infrastructure and related services. If the Euronext executives have not already got plans to find a way out of that agreement and migrate to their own platform they better start.
On jobs it is not only the Germans who may be feeling a little uncomfortable right now. Euronext has a market cap of €3.4 billion and has 615 employees, which is €55.3 million of value per employee. The Irish stock exchange is valued at €137 million and has 120 employees, which is €1.1 million per employee.
Euronext has said that Ireland will be the centre of its debt, funds and ETF business, which makes sense giving that as of the third quarter of this year the ISE was the No 1 destination for listed debt worldwide and the No 2 destination for funds.
Indeed if you are one of Euronext’s debt or funds people in France, the Netherlands, Belgium or Portugal start looking for a Dublin property now; it’s fiercely competitive. Yet even with this, one can only expect that Euronext, which has a strong reputation for automated services, must be looking at that Irish headcount with a very critical eye.
Euronext has said it will deliver synergies of €6 million a year from the integration from this deal. Only some of that will come from the centralised buying of paper clips.
The lack of detail on this expected slash-and-burn exercise may be due to the fact that while this deal has been agreed it has yet to be given the regulatory seal of approval.
The ISE is licensed by the Department of Business, Enterprise and Innovation, and regulated by the Central Bank, while the Competition and Consumer Protection Commission may also have something to say on the transaction.
I understand that the stockbrokers trousering €137 million from the purchase price and over €30 million in cash which the ISE has on its books have all agreed to a non-compete period. This means that for the foreseeable future they will not get together with another exchange and set up a competing Irish entity.
On the one hand this is an academic question; the brokers in question have no intention of setting up a rival exchange.
That said the regulators may not like the idea that this option is precluded. The Irish stock exchange is a monopoly and regulators do not normally like monopolies. Moreover they do not like clauses which preclude others from entering the market to compete even if in the real world that is very unlikely to happen.
These days every deal has to be a play on Brexit and the sale of the Irish stock exchange was no different. I understand that in its pitch to the stock exchange’s shareholders Euronext talked about turning Brexit risks into opportunities. The thinking seems to be that London-listed companies concerned about being cut off from a pan-European capital base will look to Ireland, with its common language, common-law system and corporate governance.
It all sounds plausible enough but very few are convinced that this Brexit premium will really emerge.
This was also pitched, not as a takeover but as a joining of the Irish stock exchange to the Euronext federation, which is true in the sense that Cavan is part of the federation of Ireland or, perhaps more accurately, that Marks and Spencer’s Grafton Street store is part of the greater federation of the British retail giant.
There are questions that remain to be answered about the Euronext takeover but for Davy, which owns 38 per cent of the exchange, Goodbody (26.7 per cent), Investec (18.5 per cent), Cantor Fitzgerald (8.4 per cent) and Campbell O’Connor (8.4 per cent) the most pressing one must be how they will spend their new-found wealth.