The coronavirus pandemic is not likely to stop the M&A spree that Europe's top three stock market operators — London Stock Exchange Group PLC, Euronext NV and Deutsche Börse AG — have been on in the past few years.

Although the health crisis caused a slump in global M&A activity in the first half of 2020, it has not affected the deal-making appetite in the European financial market infrastructure space. M&A as a means to achieve scale remains attractive to the sector despite the pandemic, law firm White & Case said in its first-half M&A trends report released July 13, highlighting the "aggressive M&A plans" of LSE, Euronext and Deutsche Börse.

The pandemic is seen reinforcing some recent consolidation trends in the financial market infrastructure space as banks, which have been looking to off-load noncore assets, may accelerate those divestments. The crisis will also open new opportunities for financial market infrastructure players in the technology sector as demand from rival bidders such as big financial investors, banks and asset managers may be subdued in the future.

The big European exchange groups kicked their deal-making efforts into a higher gear due to Brexit and the failed merger of LSE and Deutsche Börse in early 2017. Since then, LSE has completed several transactions to strengthen its clearing, indexes and fixed-income operations. It is also awaiting regulatory approval for its $27 billion deal for market data and infrastructure company Refinitiv US Holdings Inc., agreed in August 2019.

Soon after LSE announced the deal, in October 2019, Euronext revealed a three-year growth plan that relied heavily on targeted acquisitions. And Deutsche Börse, having dropped its own bid for part of Refinitiv's business, said it had €2 billion to spend on M&A. Since the failed LSE tie-up, the German group has focused on acquisitions aimed at diversifying its business and boosting secular growth.

M&A drivers

Europe's top players are caught in a "follow-the-leader game" where "participants can hardly afford to be left behind while their direct competitors surge forward," Hyder Jumabhoy, a London-based partner in White & Case's corporate M&A group, said in an interview.

With the Refinitiv acquisition under EU antitrust review, LSE may have to sell some business to gain approval for the deal. This will likely trigger a bidding race for LSE's Borsa Italiana SpA unit, which could interest both Deutsche Börse and Euronext, Bloomberg reported in June.

Other factors are driving the exchange groups' hunt for more scale and volume, Jumabhoy said. The revised European Markets in Financial Instruments Directive, or MiFID II, has failed to shift more equities trading onto stock exchanges, and the IPO pipeline has dried up during the pandemic, so the groups need to find ways to compensate for the missed revenue growth here, he said.

A Rosenblatt Securities study, cited by Financial News in early 2020, showed that equities trading on traditional exchanges has shrunk since the implementation of MiFID II in January 2018, falling to 36.55% of all trades in Europe in 2019 from 42.18% in 2018 and 44.81% in 2017.

The continued push to digitize and innovate their business is also driving M&A, with all three European exchange groups looking for financial technology targets. LSE's Refinitiv bid and Euronext's acquisition of Finnish regulation technology companies Ticker Software and Sidonnaisuusrekisteri.fi via subsidiary InsiderLog AB illustrate this, White & Case said.

New opportunities

Euronext CEO Stéphane Boujnah said during a first-quarter earnings presentation in May that the company will not pause its pursuit of M&A, especially as strategic buyers may get a better chance to compete with "deep-pocket private equity bidders" and banks may look to off-load more noncore assets as the pandemic takes its toll.

The group sees more opportunities now as sellers are willing to cut prices, Camille Beudin, head of M&A at Euronext, said in an interview. "This is a bit counterintuitive considering the overall environment but the reality is that our sector is pretty strong," he said.

The exchanges' operational resilience and higher valuations amid the market turmoil have raised their profile as strategic buyers that can provide synergies and future growth to the acquired businesses, according to market observers.

In this environment, greater priority would likely be given to strategic buyers because with them the long-term value creation of assets is "a more compelling and easier story to understand," Hiten Patel, a partner at consultancy Oliver Wyman, said in an interview.

Demand from private equity investors will not disappear but should remain subdued for some time given that leverage finance markets, which many PE firms rely on to finance deals, almost ground to a halt in the early months of the crisis, according to Patel.

Depressed market valuations and less competition from banks and asset managers in the financial technology space, in particular, may provide stock exchanges with new opportunities for technology and data-focused deals, according to an Oliver Wyman analysis.

These trends are likely to develop over the next 12 to 18 months, Patel said.

Banks to shed more assets

Banks are viewed as a source of potential M&A in the future, following a similar pattern seen after the global financial crisis, Boujnah said. European banks were already under pressure to sell noncore operations pre-COVID-19 as their profitability waned due to negative interest rates and growing competition from new entrants, Beudin said. COVID-19 will reinforce that trend with central bank stimulus keeping rates low for even longer and hitting bank profitability further, he said.

Euronext has consistently looked to buy bank-backed financial market infrastructure assets, according to Beudin, and has closed several deals of this type, including the acquisition of Irish Stock Exchange Plc in 2018, Oslo Børs VPS Holding ASA in 2019 and VP Securities A/S earlier this year.

As COVID-19 prompts banks to revisit their core versus noncore operating business and asset allocations, many may look to off-load their minority stakes in stock exchanges and central securities depositories, as these liquid assets are an easy sell, Jumabhoy said.

This, in turn, will strengthen the European exchanges' position in the bidding for those assets, as banks will prefer to sell their stakes to "a tightly regulated entity that knows the business and aims to hold the asset for the long-term," Beudin said. As banks continue a commercial relationship with the sold financial market infrastructure assets because they are usually users of those platforms, the choice of the new owner is quite important for them, he said.

"There have been a number of transactions by private equity investors which have raised the price of services considerably after the acquisition was done," he said.