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Merger must be tweaked to succeed

SGX chief Magnus Bocker shakes hands with ASX chief Robert Elstone this week. Picture: AFP Photo Source: AFP

Merger must be tweaked to succeed

October 27, 2010, Sydney Morning Herald

SINGAPORE Exchange’s proposed $8.4 billion takeover of ASX Ltd, the operator of the Australian Securities Exchange, is going to have to be changed in Australia’s favour to succeed.

I say Australia’s favour rather than ASX’s favour, because the bid is already generous enough to succeed commercially. It is in the political arena that it will finally pass or fail, and there it is already in danger of defeat.

Singapore Exchange’s superior price-to-earnings valuation gives it a more highly valued takeover currency and this is being used to produce a share-and-cash offer that ASX’s shareholders will want.

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But in Canberra, where power is so finely balanced, reaction to the takeover yesterday signalled that even if the Gillard government backed an ASX-Singapore Exchange combination, Parliament was unlikely to clear the way by lifting ASX’s 15 per cent legislative shareholding cap.

The Greens said the takeover was not in Australia’s interests and would not be supported, depriving the government of its lower-house majority. Queensland independent Bob Katter said the merger was lunacy, and independents Tony Windsor and Rob Oakeshott didn’t immediately respond, but will surprise if they come out in favour.

The opposition was all over the place – officially pro-foreign investment and undecided, but wary that the Singapore government has a 23.5 per cent non-voting stake in the Singapore Exchange, and wondering out loud whether total capitulation is necessary to open the door to Asia’s capital markets.

The Nationals hate the deal. Barnaby Joyce said yesterday it would crater Australia’s financial services industry. And the Liberals at the very least don’t like it: shadow treasurer Joe Hockey said it was a move by a regional financial market competitor to acquire ”our own stock exchange” and said Australia’s national interest in the marriage had not been demonstrated.

No obvious alliance looms between Labor and the Coalition to overcome opposition from the greens and independents, in other words, and the Gillard government’s body language is also cool. Prime Minister Julia Gillard noted that Australia was a great free trading nation but Treasurer Wayne Swan detailed the number and height of the regulatory hurdles the merger needed to clear, and promised to examine it ”extensively, carefully and methodically”.

The two exchanges and their advisers need quickly to take on the politics and work towards re-balancing the terms of the takeover. Australia does need an umbilical link with Asia’s capital markets, and this is probably the best available.

It catches up with reality, in a sense. A decade ago, Australian brokers earned two-thirds of their revenue from the domestic market. Today, close to half their income comes from Asian hedge funds and other investors in the region, and it is common for trade in top Australian stocks to be dominated by Asia.

It will take several years before the stocks that trade here and the stocks that trade in Singapore completely

co-mingle because the Australian exchange is a significantly lower-cost trading system. If all stocks are listed on both exchanges, trading will gravitate here, undermining the Singapore platform. Singapore will over time adopt ASX technologies and pull its costs down, however, increasing its competitiveness in Asia, where it is already the cheapest exchange, and opening the way for it and the ASX to begin dual-listing major stocks.

The big negative in the proposed marriage is that the world-leading technology, such as the Chess settlement system that ASX has introduced, is the productivity enabler, but ASX and its shareholders are the junior partners in the merged business.

Shareholders are paid handsomely, but only four ASX directors will sit on a 15-strong holding company board that will sit above the two exchanges, and the highest-ranked Australian director, current ASX chairman David Gonski, will be deputy chairman of the merged operation.

This is understandable in a commercial sense. The growth premium that the market loads into Singapore Exchange shares means that it is the senior partner by value, even though it still earns less money.

But the reaction in Canberra yesterday showed that the deal in its current shape is politically untenable. It is true, as both ASX and Singapore Exchange are pointing out this week, that after taking over ASX, the Singapore Exchange is hardly likely to make decisions that hurt the value of the investment.

The message from Canberra is, nonetheless, that for the deal to become politically palatable, its terms must change, to give ASX’s leaders a greater say in the destiny of the merged business. One obvious step is an increase in the number of ASX directors on the proposed holding company board.

Consider the next possible step – an alliance or merger with the Hong Kong Exchange – and the potential becomes clear. China is Australia’s most important trading partner and the ASX cohort in the merged entity would almost certainly back a Hong Kong Exchange alliance.

Whether Singapore Exchange’s leadership would feel the same way is less clear: the two Asian exchanges have been head-on competitors over the years.

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