Barriers to ASX merger are futile

Andrew Main
The Australian

Now people have blown off some steam about the perceived iniquities of the Singapore Exchange-ASX deal, let’s look at the alternatives.

Forget for a moment all that stuff about loss of sovereignty, poor white trash of Asia selling the farm, etc. Close your eyes, breathe deeply and count to 10.

Let’s look at a couple of exchanges that have chosen to rebuff overseas merger proposals and how they’re going: NZX in New Zealand and LSE in London. The answer, simply, is that they’re hanging on but for a variety of reasons they’re not making the progress they would dearly like to make.

NZX rebuffed a $20 million approach from ASX in 2000. One of the expectations across the ditch was that NZX would see a dramatic rise in value, as had happened at ASX after it demutualised in 1998. Those hopes for the dramatic rise in value have subsequently been dashed by the gradual listing migration of many NZ-based companies such as Fernz (into Nufarm), Lion Nathan and Fletcher Building Products across to Australia.

Six years ago, the market capitalisation of all the stocks listed on the NSX was around $NZ50bn and last Friday the total was almost unmoved at $NZ49bn ($38bn). Over the same period, the market cap of all the shares listed on ASX has climbed by more than 50 per cent to $1.65 trillion. It’s an echo of New Zealand prime minister Robert Muldoon’s old joke about the exodus of Kiwis to Australia raising the IQ of both countries, only this time the exodus is helping boost market cap in Australia and unless companies are dual-listed it’s cutting local NZ representation. Lion Nathan is now wholly owned by the Kirin Group of Japan, so we’ve both lost out. But, for instance, Fletcher Building has a market cap of $3.8bn and it’s listed on both ASX and NZX.

NZX hasn’t faded from sight, but under CEO Mark Weldon, it is undertaking all sorts of expansion into derivatives trading to keep the money coming in. At an investor presentation in March, NZX said it was expecting that within five years more than 50 per cent of revenue would come from derivatives, and equities trading would account for no more than 40 per cent.

As regards capital raising, which was the original intention of all stock exchanges, NZX reported rasing $NZ605m new equity in the first half of calendar 2010. In the year to June 30, 2010, ASX listed companies raised a total of $77bn, which is more than the market cap of the entire NZ market.

An investor calling themselves “very concerned” put up a note on a NZ website last week saying that “If the ASX-SGX merger goes ahead, a lot of NZ companies will be listing in the ASX/SGX. They will get more coverage than NZX. If I am in the agricultural trade, listing in ASX/SGX will increase my coverage from Australia to Asia.”

You get the drift. NZX is small and pugnacious and it will still be here in five years’ time, but unless something dramatic happens it won’t be fulfilling its original purpose of raising big licks of equity capital.

And the LSE, meanwhile, has spent a decade fighting off some bids and trying to organise mergers. It was squired by German exchange manager Deutsche Borse in 1999 and 2000, Macquarie Bank in 1999, and then the US Nasdaq market operator in 2006 and 2007. Nasdaq sold its shares after being rejected and its 28 per cent stake in LSE ended up in the somewhat undecided arms of the Dubai Stock Exchange. Dubai still owns 20 per cent of it.

Nasdaq subsequently took over OMX markets of Stockholm, the business that was put together by the man who is now SGX chief, Magnus Bocker. Deutsche Borse ended up being taken over by the New York Stock Exchange as part of Euronext, which in turn had merged Frankfurt, Paris and Brussels.

The bad news for LSE is that it is having its lunch gradually eaten by new market entrants such as Japanese owned Chi-X, which has firm designs on opening up in Australia next year, and a group called BATS Global Markets, which started up in 2005 in Kansas City. It’s worth noting that LSE now only controls around 50 per cent of all the equities trading going on in Britain.

In conclusion? There’s a raft of imponderables out there, but the most likely consequence of countries pulling up the drawbridge on the notion of cross-border sharemarket manager mergers is that the new borderless world of share trading will just devise its own way of working round the holdouts.

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