When Australia’s deputy prime minister and treasurer Wayne Swan announced that Singapore Stock Exchange’s (SGX) planned partnership with its Sydney-based counterpart would be blocked on grounds of national interest, it fuelled fears that protectionism was making an unwelcome appearance on the global exchange landscape. Many worried too that it would set a dangerous precedent for other bourses attempting to forge international partnerships.
Mr Swan said he viewed the bid as a takeover rather than the promised partnership and denied the decision to obstruct it was influenced by anything other than the merits of SGX’s bid. The Australian political landscape is delicately balanced, however. The deal required approval from the (hung) parliament, and would most likely have embroiled the minority Labor Party government in an unpopular battle with Greens, Nationals and independent members of parliament. Senator Bob Brown, leader of the Greens, had already voiced his opposition to the deal, arguing that the exchange should remain in Australian ownership, and criticising Singapore’s human rights record.
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Meanwhile, 15,500 kilometres away in Toronto, local hostility to the London Stock Exchange (LSE) Group’s bid for TMX Group, which owns the Toronto Stock Exchange, had also become apparent. And Deutsche Börse’s play for NYSE Euronext met with resistance from those concerned about the consequences of an icon of US capitalism ending up in German hands. For those attempting to negotiate deals, the fear is that partnerships which make economic sense are derailed by populist legislation. “There’s a lot of politicking going on and my worry is that regulation is introduced based on political rhetoric, not fairness,” says Alasdair Haynes, CEO of European trading venue Chi-X, itself currently the subject of takeover bid by a smaller competitor, BATS Europe.
The result of these proposed deals could have ramifications for bourses across the globe. A spokesperson for the Tokyo exchange notes that consolidation is begetting consolidation among trading venues at present, and predicts that if the mergers currently under consideration actually take place, it will greatly ease the passage of future tie-ups.
A chilly reception
These mergers are currently far from concrete, however. Judging from the sometimes vocal Canadian press at least, there is little warmth toward the proposed LSE/TMX tie up. Local opponents of the deal also include some of the country’s largest financial institutions, as well as politicians, and mining and energy firms.
Under the terms of its bid, LSE’s shareholders will hold 55% of the newly created group’s capital, while its CEO, Xavier Rolet, would head the group. It is not necessarily a massive disparity in power, but it is enough to ensure that the key concern for those hoping to derail or alter the deal is a failure to realise the oft-promised 'merger of equals'. It is crucial that Canada safeguards against a loss of influence and expertise in its own capital markets, they argue.
In an April report, a select all-party committee of the Ontario legislature declined to back the deal in its current state, and proposed stringent conditions to the merger, focusing on structure, regulatory requirements, job guarantees and maintaining TMX’s ability to make decisions and concessions for the mining sector. It also requested that the board of directors be split evenly between Canadian residents and foreigners.
Committee member Gilles Bisson, a member of the provincial parliament with the New Democratic Party, produced an additional minority statement opposing the bid. “At this point, it’s clearly not a merger of equals, it’s a takeover,” he told The Banker. “If you as a nation can’t have a say about capital markets strategy and control strategies around the raising of capital, then what’s the point?”
Mr Bisson is also concerned that being part of a larger organisation may harm TMX’s relationship with Canadian companies. “We have become very good at raising money for energy and natural resource projects, and we should not put that at risk,” he says. “If we end up diluting the expertise we have here in Toronto, that would not bode well for industry.”
Elsewhere, Toronto-Dominon CEO Edmund Clark has commented that TMX could strike a better deal, while National Bank CEO Louis Vachon vocally opposed the merger, describing LSE as a “weak” partner. Both banks declined to comment further when contacted by The Banker.
Net benefit
How likely is it that political opposition will disrupt LSE’s bid? The final decision lies with the federal government, which will rule on whether the deal offers the “net benefit” required by the Investment Canada Act. A refusal to ratify the merger would not be without precedent. Last year saw BHP Billiton’s hostile bid for PotashCorp derailed due to government intervention, although that was only the second time the act had been invoked since its 1985 creation.
Sentiment does not seem to be as universally against the deal as it seemingly was in BHP Billiton’s case, however. The banking world, for example, is split. Barbara Stymiest, Royal Bank of Canada's group head of strategy, treasury and corporate services, herself a former CEO of TSX Group (TMX's pre-2007 incarnation), defended the deal at a hearing of the select committee in March. “What on earth is anyone afraid of in the face of this transaction?” she asked, urging the committee to “lift [their] heads up and see the future”, pointing to the success of other merged exchange groups, such as Euronext, to support her cause.
Because of globalisation, logically there's no basis for waving the Canadian flag and saying we need to keep TMX because it's part of Canada
Ms Stymiest described the complaints being raised about the proposed merger as being neither “new, nor large”. “It may be that there is a sense we aren’t ready to become something larger, something transatlantic. It may be that, like the national securities regulator debate, there are too many interests protecting something other than the real subject of discussion. Or it may be that there is still confusion between trading and the process of capital formation,” she said.
During her tenure with TSX, Ms Stymiest said the exchange group had met with the LSE on more than one occasion with a merger in mind, and had discussed consolidation with US exchanges as early as 2002. At the time however, nationalist sentiment would have threatened to derail a tie-up, she added. “Getting it right was the challenge, and in more than one country there was a board of directors or a government that was terrified of selling out the homestead and [not] protecting the flag."
TMX Group’s head of equities, Kevin Cowan, concedes LSE's bid is facing “political headwinds”, but maintains that it should not be considered as a premium deal or takeover. “This is a structure, which we think stands on its own. And while there are political issues and concerns, we are addressing them,” he says.
New bid
Mr Cowan was speaking prior to the emergence of a new local threat to LSE’s offer. On May 14, TMX confirmed it had received a large counter-bid from a corporation formed by a number of Canadian pension funds and banks, operating as the patriotic moniker of Maple Group Acquisition Corporation. The new offer is worth C$3.6bn ($3.69bn) versus the LSE’s C$3bn.
Exchange officials said they would fulfill their legal responsibility to evaluate the proposal, but planned to continue in efforts to acquire regulatory and shareholder approvals for the LSE deal, refusing to comment further on the rival bid.
Maple Group's bid may have a financial edge, but it faces challenges of its own. In particular, the recent collapse of Intercontinental Exchange (ICE) and Nasdaq’s $11.3bn counteroffer for NYSE Euronext on antitrust grounds could set an unwelcome precedent for the group’s all-Canadian membership. Alpha ATS, the country’s most successful alternative trading system, which has made inroads into the national exchange’s market share in recent years, is majority owned by banks. If Maple Group’s bid were to succeed, it would result in a conglomerate with a near-monopoly on equities trading, a prospect that is unlikely to sit well with regulators.
German takeover
In the US, numerous opinion column inches have been dedicated to deriding the possibility of the New York Stock Exchange ending up in foreign hands. Unfavourable comparisons have been drawn to previous large takeovers by German firms, such as Deutsche Bank’s purchase of New York-based Bankers Trust in 1998, which was marred by demands that the deal be blocked or delayed while evidence suggesting the German bank helped finance firms involved with the Nazi regime was investigated.
Peter Morici, former director of economics at the US International Trade Commission and economist and professor at the University of Maryland’s RH Smith School of Business, says the worst-case scenario for the deal would be a repeat of Daimler’s 1998 takeover of Chrysler, which saw the German firm pay $36bn for the Detroit-based automaker in a deal also dubbed a 'merger of equals', only to eventually sell it off to private investment firm Cerberus Capital Management in May 2007 for just $6bn, a shadow of its former self. “There’s going to be consolidation among stock exchanges, and we’re going to have global platforms, but location of ownership is very important,” he says.
Peter Morici, former director of economics at the US International Trade Commission and economist and professor at the University of Maryland's RH Smith School of Business
A further risk, Mr Morici argues, is the loss of US jobs. “If Deutsche Börse acquires NYSE [Euronext] there are all sorts of assets located in the US which won’t be eventually… it won’t just be NYSE jobs which go, but also those in investment banking and IT.” German positions are at risk too, however, and the council representing the Frankfurt-based group's employees has also voiced opposition to the deal. Both halves of the transatlantic partnership declined to comment, but officials have said they expect to save $411m as a result of combining the two companies’ IT systems and other operations. Such cuts are arguably necessary in a tough competitive environment where the national exchanges support staff numbers several orders of magnitude larger than their alternative trading platform competitors, however.
Loss of prestige?
Even those not against the merger in principal have been keen to avoid a perceived loss of prestige to a totem of American capitalism. Charles Schumer, the senior US senator from New York, has insisted that NYSE’s name be used first in the new group’s title, arguing that the decision would have greater significance. “If Deutsche Börse pushes any alternative name, it would be an indication that [it is] not viewing this deal as a merger of equals and that could have negative consequences with regard to future decisions on the merger’s implementations,” he said in a statement.
Nomenclature aside, political opposition has been minimal and bankers also appear to back Deutsche Börse’s bid. Jack Vensel, global head of wholesale services at Citi, describes it as “an opportunity for two tremendously significant organisations who are feeling the pressure to to cut back on their costs”.
Nevertheless, ICE and Nasdaq’s bid appeared to play to nationalistic sentiment, says Maurizio Bradlaw, a partner with consultancy Capco. “It was driven out of the wish that NYSE, as one of the largest exchanges out there, be US governed.” The takeover offer has now been abandoned, however, after the US Department of Justice antitrust unit made it clear that the deal would be blocked, despite Nasdaq CEO Peter Greifeld’s attempts to reposition the move as a necessary one for the US to compete on the world stage.
There's going to be consolidation among stock exchanges, and we're going to have global platforms, but location of ownership is very important
In any case, even opponents of Deutsche Börse’s bid, such as Mr Morici, agree that under US law, the chances of the deal being derailed on national interest grounds are essentially nil. Potential anticompetitive issues have been raised here too, however, specifically in the derivatives space. The planned Deutsche Börse/NYSE Euronext amalgamation would own five options exchanges (International Securities Exchange, Eurex, NYSE Amex, NYSE Arca and NYSE Liffe) and two large futures exchanges (NYSE’s Liffe and Deutsche Börse’s Eurex operations). NYSE Liffe and Eurex do not currently compete directly with each other, but the removal of even the potential for competition has caused some apprehension, and market participants and industry bodies, including the Association for Financial Markets in Europe, have expressed concern about damage to competition in the derivatives space, as well as the potential increase in risk caused by dealing with fewer venues.
The merger still has to be cleared by EU competition authorities, but Deutsche Börse’s CEO Reto Francioni has said the bourse is making progress with regulatory bodies.
Losing out
Secure or not, Mr Francioni will certainly be keeping two fingers firmly crossed. The risks of a deal failing could be significant. At the most basic level SGX incurred costs of S$12m ($9.61m) in its unsuccessful Australian venture, pushing income down 10% year on year.
Australia may have lost out too. The deal would have created an international trading hub with the potential to rival Hong Kong in the Asia-Pacific region, and while Australian treasurer Mr Swan has said the deal would be “contrary to the objectives” of his goal to increase “Australia's standing as a global financial services centre in Asia”, others are not so sure. ANZ CEO Mike Smith, for example, has said that opposition to the deal is symptomatic of increased protectionism and will hinder future foreign investment in Australia.
The Australian Securities Exchange (ASX) itself, now forced to go it alone, may soon be in something of an unappealing position. In May, the Australian Financial Review granted Chi-X Global a licence to begin operating in the country, ending ASX’s 20-year monopoly.
If Chi-X manages to wreak the same kind of mischief it has elsewhere, the national bourse will face the prospect of seriously eroded market share when the alternative platform opens for business in October. Chi-X’s Canadian venture, which launched in 2008, reported it set a firm trading record of more than 10% of total Toronto Stock Exchange-listed share volume. Meanwhile, Chi-X Japan, which launched just last November, netted 1.31% of lit market turnover in the week ending May 13, according to Fidessa data.
ASX then, could find itself facing a tenacious competitor with a strong track record and unable to benefit from the economies of scale promised by a tie up with SGX.
International alliances
In Canada too, the benefits of rejecting LSE’s bid in an effort to protect national interests could prove illusory. In her testimony to the select committee in Canada, former CEO Ms Stymiest stressed that for TMX to continue to develop, it must consider international alliances. “Where is growth coming from? The answer lies, at least in part, beyond our borders,” she said.
The exchange’s current situation is not overly comfortable. Its market share has already been pushed below 70% and more upheaval is yet to come, thanks to increased competition and the impact of looming regulation, says Sang Lee, managing partner with Aite Group and author of a recent report on Canadian equities markets.
Being unable to strike a deal could leave smaller bourses sidelined as the march towards global exchange groups continues. For TMX, the dangers are very real, says Renée Colyer, former research director at the Toronto exchange and co-founder of capital markets research firm Forefactor. “I don’t know if there would be any other offers forthcoming if the government is perceived as blockading [mergers and acquisitions] activity in that sector. When legislators decide they are finally ready to approve a bid, it might not be forthcoming because of the fear of having to clear the political hurdles associated with merging with a company in Canada," she says.
The Maple Group bid also raises the question of where LSE itself would stand if it were spurned. The London-based group might even end up the object of takeover bids itself. It would likely prove an attractive target for predatory exchange groups, such as Nasdaq, from which it has been the subject of unwanted attentions before.
There is much at stake for both halves of the Anglo-Canadian deal, says Chi-X’s Mr Haynes. He describes LSE’s bid as a “very defensive” move, under which the two firms are being forced to consolidate to benefit from various cost synergies. “I think this is a deal they had to do,” he says. “Otherwise both remain vulnerable.”
“We have strong futures as we are, but we will be stronger together and have something additional we can put across,” says David Lester, director of information services at LSE Group. He adds that the deal was proposed not for defensive reasons, but to benefit trading clients and issuing companies. Mr Lester also reveals that the group hope to use Toronto as a “launchpad” to compete with the US exchanges.
Flag waving
Some, Ms Colyer among them, see an attachment to a national exchange as faintly anachronistic. “Because of globalisation, logically there’s no basis for waving the Canadian flag and saying we need to keep TMX because it’s part of Canada,” she says. “But emotionally, or behaviourally, there might be a little piece of that left with Canadians."
Mr Haynes agrees, arguing that the nature of today’s trading landscape makes such attachments irrelevant. “People who think like that are wrong, because trading just isn’t like that anymore. Traders just want liquidity and efficiency,” he says. “Governments and the man on the street still think they have to protect their official stock exchange because they’re part of the establishment, but we have to move on from that.”
For many, including Mr Lester and Mr Haynes, the logical conclusion of this line of thinking is the frequently quoted “national airline scenario”. Almost every country feels it should have its own carrier, but the realities of tough market conditions and competition from low-cost providers forces the more traditional full-service providers to seek alliances and consolidation to keep costs down. Certainly, the notion that a stock exchange is an essential national interest in the manner of a health sector or defence industry, is highly questionable.
Given the speed at which bids, counter-bids, announcements and all-out media wars have been popping up on both sides of the Atlantic, it takes a brave or possibly foolish observer to make any definite predictions about exactly what decision regulatory bodies, boards and shareholders will arrive at. Whatever they do settle on, however, will likely have major consequences for the multitude of other bourses that are currently biding their time and mulling over the possibilities of seeking a partner or two of their own. As things stand, the one thing almost every sector of the market agrees on is that this is only the start. Consolidation looks set to keep exchanges, regulators, banks and journalists alike busy for some time to come.
