Stock Investment Lesson Pain

London Stock Exchange (LSE) Buys Part of Clearinghouse

London Stock Exchange (LSE) Buys Part of ClearinghouseLondon Stock Exchange Group (LON:LSE) said Friday that it would be buying a 60% stake in LCH.Clearnet, the independent clearinghouse for 463 million euros ($612 milion).

This trend of financial exchanges trying to make big purchases has been popular lately as the big exchanges look to get profit margins back to normal. However, most of these deals have fallen through the cracks.  For instance, Deustche Borse’s planned acquisition of NYSE-Euronext was rejected by European regulators due to antitrust fears.

This deal involving the LSE and LCH.Clearnet must have regulator approval to be declared official.  However, to sweeten the pot, LSE has said they will pay the clearinghouse’s shareholders 19 euros for each share on top of a 1 euro special dividend that will be paid in five years.  This potential deal would value LCH.Clearnet at 813 million euros.  According to both sides, the deal is expected to clear in the last quarter of this year.

However, European regulators have been trying to increase transparency in the EU’s trading, especially over the counter derivatives which clearinghouses are used as financial intermediaries which guarantee trades if one side of the trade defaults.  This could be an issue for the LSE down the road, as derivative trading becomes more and more popular.  Despite this risk, analysts are saying the exchange would be able to earn extra fees to boost profits.

The LSE has said that if the deal passes, it can expect annual savings of 35.8 million euros by the end of 2012. However, both companies have confidently said that cost cutting could save 23 million euros by the end of the third year of partnership.  This deal will put the LSE on the same level as its competitors which have already established positions in their clearinghouses.

This is a good deal for both sides in this case.  LSE will be able to save a lot of money and gain on extra fees in the process.  This is further help stabilize its business and help it whether economic shocks that Europe has been known to face recently.  However, as I stated above, the increase popularity of derivatives could hurt the clearinghouse if one side of the trade can not pay up for the derivative.  This could put the LSE is a tough spot and actually create problems for the exchange.  As long as the derivatives and other risky trading vehicles are contained, this should be a great deal for both sides.

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