Local bourse operator ASX Ltd has unveiled a $US12.3 billion merger with Singapore Exchange (SGX) this morning, the first major consolidation of bourses in Asia-Pacific. The cash and scrip deal received a preliminary thumbs up from the Australian Competition and Consumer Commission, with Graeme Samuel saying this morning he couldn’t see a merger between the two raising competition concerns for the watchdog.
So what are the implications of the merger? Intelligent Investor’s Steven Johnson answered some of our questions over the deal:
What’s in it for the ASX? And the SGX?
ASX shareholders will get a nice 37% premium to the latest share price of $34 or so. It looks a very attractive price for a business that is going to face its fair share of challenges over the next few decades.
The Singaporeans will be hoping that the benefits they gain from putting the two businesses together will more than offset the premium they are paying to acquire the Australian business.
What’s the rationale behind the deal?
Stock exchanges are high fixed cost, low marginal cost businesses. In plain English, that means that once they have spent substantial amounts of money establishing systems and building infrastructure, the cost of processing an additional trade is negligible.
For businesses like this, bigger is better, because they can generate substantially more revenue without a proportionate increase in costs. And that’s the rationale behind putting ASX together with SGX — they’ll be able to generate the combined amount of revenue with a cost base substantially less than the total cost of running the two businesses separately.
There has been talk about the benefits of Australian companies being able to access Asian markets and this may well be a good thing, but most of the rationale is financial.
Why has it resisted such moves in the past?
The ASX has had a very profitable monopoly here in Australia for a long time. As an example of the type of rapaciousness this has allowed them to get away with, the ASX charges our small business $16,000 per year in ‘data access fees’. This allows us to publish stock prices, delayed by 20 minutes (if you want real-time data, you need to pay more). With such an unfettered postion, there’s been nothing to stop them growing organically for a long time and there’s been no reason to merge with anyone else, especially given most foreign exchanges face substantially more competition.
The threatened introduction of competition into the Australian market has presumably led the board to start thinking about alternatives, and regional consolidation is one option that makes a lot of sense.
Will the deal get approval?
It’s hard to imagine there being too many problems. The ASX already has 100% of the market, so it’s going to be hard for the ACCC to argue that the deal would decrease competition. And now that most of the regulatory functions have been handed over to ASIC, there isn’t much of a compliance rationale for knocking the deal back either.
What about the prospect of foreign ownership of a national asset?
Perhaps this is the issue that will cause most controversy but I doubt it will be show-stopper. With the right regulatory oversight it’s hard to see a serious national interest issue.
As a country, we run an enormous current account deficit which is financed by Asian savings. They need to invest all those Australian dollars somewhere; we had better get accustomed to Asian ownership of Australian assets.
Any other exchange companies that have successfully merged?
US and European exchanges have been merging on a regular basis for the best part of a decade. The New York Stock Exchange bought Euronext; Deutsche Bourse bought a large US options exchange, the International Securities Exchange; and Nasdaq, the US technology-focused exchange, bought OMX, a company that controlled seven Nordic and Baltic exchanges.
It’s been reported ASX and other Asian exchanges are investing in new technology to counter the threat of “dark pools”, or alternative trading systems — what are these alternative systems?
They are sophisticated pieces of software that allow large investment banks and hedge funds to bypass traditional stock exchanges and trade directly with each other. Typically, trades cost substantially less and the disclosure requirements are not as onerous as they are on traditional exchanges — which makes them particularly attractive to investors or traders who don’t want everyone else to know what they are doing.