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Why a Merger of Singapore and London Exchanges Is Unlikely

Rumors of yet another possible cross-border merger between two stock exchanges gathered pace on Friday, after a British newspaper reported that Singapore and London bourses are in takeover talks.

Pedestrians walk past the headquarters of the Singapore Exchange located in the SGX Centre in Singapore.
Munshi Ahmed | Bloomberg | Getty Images
Pedestrians walk past the headquarters of the Singapore Exchange located in the SGX Centre in Singapore.

Still, most analysts believe a deal is unlikely to materialize, because the benefits of a tie-up are simply not compelling.

“I’m not generally supportive of cross-border exchange merger and acquisitions, as cost synergies, normally the most compelling rationale for exchange deals, are limited,” Sam Hilton, Analyst at Keefe Bruyette & Woods Asia, told CNBC. “Multiple exchange CEOs have said that they talk about this sort of thing regularly, and nothing comes of it the majority of the time.”

The Daily Telegraph reported on Thursday that the London Stock Exchange Group is in talks with the Singapore Exchange about a potential 7.2 billion-pound ($11.3 billion) merger, after a consortium they both were part of failed in its bid for the London Metals Exchange earlier this year. The LME was eventually bought by Hong Kong Exchanges and Clearing.

Speculation that the two bourses are seeking closer ties also came on the back of an agreement earlier this month that each would allow its largest and most actively traded stocks to be traded on the other’s exchange.

However, these are not convincing reasons for the two to combine, said Justin Harper, Market Strategist at IG Markets in Singapore.

“You don’t need to merge at all to get synergies,” Harper told CNBC. “You can do a great deal by saying you can trade each other’s stocks, which they have already done, without all the costs of merging.”

He added that while Singapore has indicated that it wants to make acquisitions, its intention is not to expand in Europe. SGX had made an $8 billion bid for Australian stock exchange operator, but dropped the attempt in 2011 after opposition from the Australian government.

“It has only shown interest in Asia and only made a bid in Asia and that’s for the Australian exchange,” he said. “Yes, they failed in buying the London Metal Exchange but I don’t think they’re too worried about it because Singapore has no metal trading.”

Indeed, the “vastly different geographies” covered by the two bourses is why a merger would be hard to justify, according to Arjan van Veen, Analyst at Credit Suisse in Hong Kong. But he does see some benefits in the sharing of technology or expertise.

“Creation of a truly global derivatives exchange where you could trade any index in the world any time of the day seamlessly may be one of the key benefits of such a merger,” he said.

SGX said on Friday that it is " not engaged in talks with the LSE on a potential merger."

"However, we are open to collaborations and partnerships which may benefit our shareholders and the company," the company said in a statement.

— By CNBC’s Jean Chua.