The City was rocked on Wednesday by news that the London Stock Exchange Group PLC (LON:LSE) had received a £32bn unsolicited takeover offer from Hong Kong Exchanges and Clearing (HKEX), the owner of the Hong Kong Stock Exchange (HKSE).
A bid for the prestigious LSE by an Asian rival has surprised many, including the market’s various analysts, while also garnering a somewhat sceptical reception as to the ability of HKEX to pull it off.
But how does the Hong Kong Stock Exchange stack up against its rival in the Square Mile?
Facts about the Hong Kong Stock Exchange
Officially known as The Stock Exchange of Hong Kong, the bourse is Asia’s third-largest exchange by market capitalisation, beaten out only by the Shanghai and Tokyo Stock Exchanges.
As of 2018, the HKSE had a market cap of around 29.9 trillion Hong Kong dollars (£3.09 trillion) and 2,315 companies listed on its board.
Among the exchange’s biggest hitters are companies such as Chinese tech giant Tencent Holdings, worth around £333bn, China Construction Bank, worth £156bn, and telecoms conglomerate China Mobile at £140bn.
By contrast, the LSE is marginally ahead in market cap at £3.72 trillion as of April 2018, while as of August this year the exchange has around 2,040 listed companies across its main board and its junior Alternative Investment Market (AIM).
It’s largest companies also stack up relatively equally, with LSE-listed oil giant Royal Dutch Shell PLC (LON:RDSB) carrying a £185bn market cap alongside fellow oil giant BP PLC (LON:BP.) at £104.4bn and HSBC with £123.7bn.
In terms of average daily turnover, the HKSE also come out ahead reporting around £8.9bn in daily turnover on average for August 2019, while for the LSE the figure came in at around £4.9bn.
But while a tie-up between the two exchanges may be considered a union of equals in numerical terms, it is the non-statistical elements that are likely to cause a headache for those backing HKEX’s bid.
By far the largest factor causing scepticism among investors will be the potential political implications of a tie-up between the LSE and HKEX.
“The UK government may not wish to see such a vital symbol of UK financial services strength, and indeed a strategic asset, to be owned by foreigners”, said Neil Wilson, chief market analyst at Markets.com, adding that the merger would effectively hand control of the exchange over to the Chinese government through the “back door” of Hong Kong, which while governed under the ‘One Country, Two Systems’ principle is ultimately accountable to Beijing.
Given that the Hong Kong Government is currently the largest shareholder in HKEX and has the right to appoint six of its 13 directors, suspicions of Chinese government influence could be well-founded.
Also, the results of the deal would leave the LSE’s current shareholders owning just 41% of the newly combined group, which Wilson says could be appropriated by the People’s Republic “at any moment”.
More bids from Hong Kong
“Hong Kong groups are clearly looking at what's happening and seeing they need more international exposure”, Wilson said, adding that one potential upside of HKEX’s pitch was that it could offer a “gateway” for Western companies into Chinese markets, which were “increasingly opening up”.
However, despite this potential advantage, Wilson said exposure to the Hong Kong market in the current climate would end up with UK shareholders with a “glass half empty”.