Singapore Exchange’s (SGX) US$8 billion bid for the Australian Securities Exchange (ASX) came as a surprise. When two major national exchanges, power houses in their own backyards, propose integrating their platforms into one and construct a larger market for their nationals to trade, it’s a deal that makes the world sit up and take notice.
Is Asia ready for a pan-Asian exchange straddling national boundaries, time zones and regulations? The idea has been brewing for decades, but when it finally took concrete form through SGX’s ambitious bid, it seemed to have transcended the purely commercial considerations driving the deal. Taken in the context of how the world’s economic gravity has gradually shifted to the region, it assumed a symbolic and geopolitical significance too.
What made the proposal more compelling was that it came at a time dominated by talks of brick and mortar national exchanges going the way of the dodo, if they fail to stop the accelerating migration of market players to alternative trading systems that provide faster execution at lower cost.
Clear advantages
The benefits of a merger for the incumbent exchanges are obvious. Provided its cost does not explode, the merger would translate into a larger pool of liquidity and possibly cheaper execution costs. SGX would benefit from the listing of globe-beating Australian mining companies such as Rio Tinto and attract more of the pension funds that Australian asset managers are investing outside Australia. Singapore-listed start-ups would benefit from cheaper funding to fuel their ambition to become world-beating giants. A merger could boost liquidity for Australian stocks and give them more global appeal.
Even more riveting is the prospect that such a merger could spark a major consolidation of stock exchanges in the region and even lead to the creation of a pan-Asian stock exchange rivalling, in pre-eminence and dominance, those in the US and Europe, and thus providing the necessary infrastructure to symbolize the region’s rise as an economic superpower.
Those not entirely sold to the idea of the deal argue that the reality is less buoyant and point to misgivings about whether such an M&A exercise is worth the effort in an industry facing tough competition from more efficient players and whether the danger exists that a merger saddles the surviving exchange with debts that cripple its competitiveness against other platforms.
But combining systems and infrastructure located in two different jurisdictions won’t necessarily impact the end users, Instinet CEO for Asia-Pacific Glenn Lesko points out. “You don’t see Singapore stocks trading in Australia or Australian stocks trading in Singapore now, and that is because there are different regulators, settlement systems, and clearing involved across markets.” If nothing else changes besides ownership, it may be too complex for cross-border trading to happen in any meaningful way, he suggests. “Unless clearing and settlement and regulations change, it will just be one exchange owning the other, with no real change in the way stocks are traded in either country.”
The more complex trading structures resulting from a merger means the surviving exchange could be dependent on expensive technology solutions.
The difficulties facing the exercise have stirred speculation that the executive board of both exchanges may not have fully considered the ramifications of such a union and the SGX may have gone out for it, simply to put one over Hong Kong, its most prominent rival in the region. SGX officials may bristle at the suggestion that their market remains a global trading backwater, but the truth is that despite all the sophisticated platforms which SGX has created to attract liquidity from all over the world, it has yet to receive the level of attention which the Hong Kong exchange currently generates among global traders and investors.
The latter has enjoyed an edge in recent years on the back of its bulging menu of red chips, H-shares as well as other mainland Chinese and regional enterprises traded on its board. SGX is determined to catch up and join the global league and it looks like a window has opened, enabling it to do so.
Threat from alternatives
The gamechanger for Singapore unexpectedly came from alternative trading systems, trading platforms that are starting to roll (albeit in a slow fashion) into Asia, but whose impact is likely to grow into gale wind force in the way shares are bought and sold among traders and institutional investors. Insecurities brought about by the looming entry of these trading platforms into Australia prompted the executive board of ASX to scramble for a deal with SGX that will see them combine into a regional exchange with pan-Asian ambitions.
The recent manoeuvrings have contributed to the less than sanguine view that the merger is the end-game for an industry threatened by fragmenting liquidity, as trading migrates to exchanges where alternative trading platforms offer cheaper and faster trades. Hence the view that the ASX-SGX merger could be the clearest signal of a dangerous turn in the fortunes of exchanges across the region.
Chew: Rationale for merger is to enhance competitiveness
Chew Sutat does not view it in that way. SGX’s executive vice-president for corporate and market strategy believes that the merger will in fact enhance the competitiveness of these senior exchanges. Speculation in the international media that the merger reflects the incumbents’ fear of competition is unwarranted, argues Chew, pointing out that SGX has always been proactive in launching new products, especially derivatives. “SGX does not view alternative trading platforms as a threat, but rather as a complement to the development of local markets. Just as they do in the US and Europe, alternative trading platforms enhance depth and liquidity in the markets in which they operate.” Is Chew sugar-coating reality?
Alternative trading systems such as Chi-X have taken a large chunk of trading volume away from traditional exchanges in the UK and Europe and they are making inroads into Asia. Their threat has been acknowledged by ASX CEO and managing director Robert Elstone, a proponent of the merger, who told analysts in a briefing on October 25 that the decision by the Australian government early this year to grant Chi-X a licence to operate in Australia was an important factor that prompted the ASX executive board to finally bite the bullet and hitch the future of the exchange with SGX.
It was the gamechanger. “The ASX cannot afford any longer to be a purely domestic operation,” opines Elstone. “It has to become more international to be able to counter the threat to its future growth and margins.” He believes SGX will be the ideal partner to achieve that in an environment that is changing rapidly for exchange operators across the region.
The consolidation among brick-and-mortar exchanges is nothing new. The current ASX is, in fact, a merger of the old ASX and Sydney Futures Exchange. And ASX and SGX had formed an alliance in 2001 to make it easier to trade stocks in both countries, although the whole operation got quietly wound up because of the lack of interest and the dearth of liquidity. But the idea of working together and possibly merging with SGX has never gone away over the last 10 years, according to Elstone. “ASX has been in constant discussion about such a possibility, but the course of action didn’t crystallize until two years ago,” referring to the vast changes that have swept through global trading of equities.
Elstone and Böcker: SGX would benefit from the listing of globe-beating companies while ASX can boost its liquidity
The financial wherewithal is key for the merger to proceed. SGX CEO Magnus Böcker noted during the presentation of the deal to analysts that banks are strongly supportive of the deal with credit lines and will charge for those loans based on SGX’s investment-grade rating. The entities involved, he says, have strong cash flows and so will be able to service whatever debt will be incurred for the acquisition.
A matter of pride
During the meeting with analysts on October 25, an analyst from Deutsche Bank pointed out that Elstone himself had in the past expressed caution about the level of debt that can be taken on by an exchange business, particularly one with a substantial derivatives turnover, such as SGX. Böcker, who is comfortable with the level of debt that will be incurred, replied that he and Elstone would not be sitting there if they thought that they were not creating a company that is strong and viable enough and has sufficient cash flow to answer for those debts to be incurred to complete the deal.
"We are selling the trust [in the two entities] to our customers and we could never do that if we thought the company was too weak in terms of profitability and balance sheet.”
The proposed merger will have to go through the Australian regulators and the likelihood that they will resort to an extensive public consultation to gauge the public’s reception of the agreement is high.
It has become obvious over the last weeks that a public relations war is brewing. Following the announcement of the merger., Australian press gave voice to misgivings about the deal and wire agencies reported that it has to gain wholehearted support from the bulk of Australians.
A survey conducted after the deal was made public showed that most retail investors opposed SGX’s bid with some pushing to have the deal re-negotiated and giving the same latitude of powers to each of the side. That view could place pressure on the Australian government to block the deal on national interest grounds.
Those opposed to the deal argue that a full takeover by the SGX would inhibit Australian ambitions to become a regional financial hub. In the latest Investor Pulse survey, run by market research firm Colmar Brunton, 55% of investors indicated they do not believe the takeover of the ASX by Singapore is in Australia’s national interests.
Singapore stands to gain
Gilbert: The timing is right but the political hurdles are immense
Hong Kong-based Mike Gilbert, global head of professional trading group (PTG) at Newedge, a futures and options broker, holds that the merger is a good idea when viewed from SGX’s perspective. The timing is right, he points out, in view of all the money flowing from everywhere to Hong Kong and Singapore.
But Gilbert, who is also Asia-Pacific head of sales for clearing and PTG at Newedge, believes that the political hurdles are immense. “From the reactions seen in Australia, this proposal will need to traverse a long road before it can be a reality. The Australians are proud people. They have built a robust trading environment for stocks and there is real opposition to letting a national icon go.”
Investment bankers and a battery of highly-paid lawyers have been brought to advise the protagonists. UBS is acting as financial adviser for ASX while Morgan Stanley is watching SGX’s back in the same capacity. Freehills and Stamford Law LLC are legal advisors to ASX while Allen & Gledhill LLP and Clayton Utz are serving as legal advisors to SGX.
It is worthwhile to remember that UBS played a key role in advising and engineering the merger of one of the worst cross-border deals to be conceived in the telecommunication industry – the acquisition, in August 2000, of Hong Kong Telecom by a then unknown backdoor listing company controlled by Hong Kong tycoon Richard Li.
At first, Singapore Telecommunications had expressed interest in acquiring Hong Kong Telecom, but misgivings about selling Hong Kong’s largest telephone company to Singapore scuttled the deal.
An SGX spokesperson says that if the ASX-SGX merger is successfully executed, it would instantaneously create the second largest listing venue in the Asia-Pacific region with over 2,700 listed companies from more than 20 countries, including over 200 listings from Greater China. It would result too in the world’s second largest cluster of companies in the resource sector, with more than 900 listings. In addition, the merged entity would see the creation of the world’s widest range of Asia-Pacific listed equity, fixed income and commodity derivatives.
There is scepticism about the level of synergy that can be generated from the proposed merger and some fear it could be an exercise in futility, considering the increasing virtualization of the trading environment, in particular with the arrival of alternative trading platforms in the region. Gilbert of Newedge agrees, pointing out that when you are trading across markets, for the most part it does not matter where one is located. “With the technology available, clients within Asia are able to reach any exchange. With the trading platforms we provide to our clients, there is no geographical limitation. Clients have a choice of markets to trade and may be sitting in their own office while their servers are co-located in the more prominent exchanges in Asia. Even though such trades currently account for a modest percentage of an exchange’s daily trading volume, we expect this to increase in a significant fashion in the months and years ahead.”
Gilbert warns that integrating the infrastructure of merging exchanges requires a fair amount of investment and time. He cites the ASX-SFE merger a few years ago: “Up to now, they still have separate trading engines for cash equities and derivatives. Even if they use the same system, platform integration can still trip over various interfacing issues. It may take three years before the benefits of a merger trickle through, and by that time it could be too late because the alternative trading systems would have come in.”
Rather than being an exercise in futility, remarks Matthew Gibbs, the merger will create something momentous – the premier international exchange in the Asia-Pacific. The manager for corporate relations at ASX Group argues that each exchange offers services beyond trade execution – specifically, in clearing and settlement. “Both ASX and SGX, even before the merger, are multi-asset class and vertically integrated exchange groups. Their similar business models is one of the reasons why a partnership between ASX and SGX is compelling, and why the scale advantage it offers is real.”
Lombard: Consolidation has been seen in other markets
“Consolidation has been seen in other markets of the world and it’s understandable that it’s attempted in Asia,” says Ian Lombard, the San Francisco-based COO of Tora Trading (which runs Tora Crosspoint, a crossing platform for Japanese stocks in Tokyo). “The fact is, mergers in Europe worked quite well because technology is quite expensive, liquidity can be difficult to attract and new products are difficult to launch – consolidation created strong critical mass that facilitated further advancement on all these fronts.”
Böcker says there will be important earnings benefits if the merger goes ahead, with earnings per share of the merged entity rising by around 20% every year – without taking into account the additional income to be generated because of the synergies involved. He estimates that those synergies could bring an additional US$30 million worth of savings for the whole group.
Punters at both exchanges hope he is right and that they are not witnessing the end game for exchanges in response to the rapidly evolving cut-throat trading environment.
This was published in the November 2010 issue of The Asset.
The Asset website is at http://www.theasset.com
No comments:
Post a Comment