--- Updates with analyst comment and latest share price ---
London Stock Exchange Group PLC (LON:LSE) and Deutsche Börse AG (ETR:DB1) have announced a "merger of equals", although it could yet be gatecrashed.
The pair said the two exchanges in Frankfurt and London, with market capitalisations of €14.7bn and £10.1bn respectively, would come together in a deal to create a "leading Europe-based global markets infrastructure group".
However, it is thought the plans may face a counter-bid from Intercontinental Exchange (NYSE:ICE), the owner of the New York Stock Exchange.
Analysts said the deal had merits, bringing the FTSE, Russell and Stoxx indices all under one roof and gaining from combining major clearing houses of LCH.Clearnet and Eurex Clearing and high-revenue derivatives businesses.
But they said planned savings from the deal of €450mln a year by the third year after completion may not be enough to ward off rivals.
They also pointed to potential competition concerns and possible regulatory problems if the UK quits the EU.
M&A specialist at Warwick Business School, Professor John Colley, said: "The most likely intervention will come from the US network of exchanges and clearing houses, Intercontinental Exchange (ICE), led by founder and president Jeffrey Sprecher.
"However, the current approach of the LSE and Deutsche Börse may not be aggressive enough to see off Sprecher's unwanted attention."
Deutsche Börse shareholders would own 54.4% of the new company and LSE investors would hold 45.6%.
They expect the tie-up to save €450mln per year by the third year after the completion of the deal.
The savings are expected to come through technology-derived efficiency by removing duplication of head office activities.
The combined group will have a balanced governance structure and maintain its headquarters in Frankfurt and London. London will be the base of the holding company.
LSE chief executive Xavier Rolet will step down and the chief executive of Deutsche Börse, Carsten Kengeter, will become chief executive of the combined group.
Donald Brydon will be chairman and Joachim Faber will become deputy chairman.
The pair said the enlarged group would have leading positions across multi-asset classes including derivatives, equities, fixed income, foreign exchange and energy products.
Kengeter said: “Strengthening the link between the two leading financial cities of Europe, Frankfurt and London, and building a network across Europe with Luxembourg, Paris and Milan will strengthen
European capital markets.
"It is the logical evolution for our companies in a fundamentally changing industry. As a combined group, we will create a European player that will compete on a global basis."
Shares in the London Stock Exchange fell 9p to 2897p but Deutsche Börse's stock gained €0.55 to €76.3.
Warwick Business School's Colley said the savings from the proposed merger "seemed rather meagre".
"The real issue is achieving scale to compete on a global scale against already consolidated opponents," he said.
"Europe needs a strong champion to compete against the US exchanges and Hong Kong. However, competition authorities remain to be convinced of this argument.
"In the past European competition authorities have tended to see such mergers at a European level. The issue this time may also be the complications of a possible Brexit."
Peter Gray, partner and head of financial services at Cavendish Corporate Finance, said: "In the context of the long-term trend towards market fragmentation, the question is not so much whether there is value to be gained from integrating these two groups.
"Opportunities are rife for cost savings, but the major test lies in the regulatory hurdle which, combined with added scrutiny in the context of Brexit, places the onus on the two companies to make a compelling case for the deal over the coming months."