Shares in interdealer broker TP ICAP plummeted 33% in early morning trading after the company axed its CEO on the back of a highly disappointing trading update; in both results and outlook.

The company blames FX headwinds and increased broker compensation for undershooting profits expectations, but the profits warning itself was small fries compared to the announcement that the company was reducing its merger synergy targets from £100m to £75m by end of 2019 (a quarter reduction). Previously, synergies from the 2016 deal delivered estimate-beating savings in 2017, as the combined entity cut its suddenly bloated headcount, but the obvious savings have apparently played themselves out.

Going forward, both business integration costs and new expenses to comply with MiFID II regulations will consume most of the previously expected benefits of the merger. When a merged entity ends up with duplicate departments, cutting one (and calling it synergy) seems like a no-brainer. But when the same department requires higher compensation due to “market forces” and the severance packages to those let go are significant, the simple rationale for combining two major European brokerages is no longer quite as black and white.

Brexit looms as another major cost centre for TP ICAP, with the company still saying precious little about potential plans to set up a Continental hub for its Europe-focused dealings (both TP and ICAP originally had their roots in London). Wherever TP ICAP decides to set up operations, it will have to negotiate with local regulators and spend more (on compliance, new hires and capex), further eroding any post-merger savings.

If only they had foreseen Brexit when they decided to join forces! If only they (and we) knew what Brexit would ultimately look like, with barely 9 months to go!

Artjom Hatsaturjants, Research Analyst, 10 July 2018