Last week’s flurry of love affairs between big international stock exchanges brought the usual collection of stories about how these infatuations mean the ASX now be allowed to get into bed with the Singapore Exchange right away.

Again there was very little questioning of the business side of the deal (not the now common fear of loss of identity or loss of a valuable part of the Australian financial system). Few reporters have wondered where the higher profits will come from above and beyond the so-called synergies (aka cost cuts, sacking people) that investment banks and their clients use to justify value-destroying mergers.

And no local reporter has pointed out that the last round of trans-national stock exchange mergers six years ago have failed.

The current edition of The Economist carries one of the few reports on the upsurge of possible trans-national stock exchange mergers that does not automatically fall head over heels in love with the idea, unlike most reports in Australia, especially from The Australian Financial Review and The Australian.

The Sydney Morning Herald remains wary, as a semi-feature in Saturday’s business pages shows, but the headline, “Time is ripe for an exchange of ownership” didn’t quite reflect the sceptical tone of some parts of the article.

The Economist asked: “Has the global exchanges industry lost its marbles again” and answered its own question with a qualified yes, pointing out that the cost cuts have not been big enough to justify the mergers, actual or purported.

The Economist did point out that the slow breakdown of regulatory boundaries between various countries might be a better reason, but they will still have to acknowledge national attitudes, as we are seeing in Australia where the questioning of the Singapore takeover of the ASX continues, but at a pace more muted than before Christmas as the ASX lobbyists work their way around the Labor government.

But The Economist article omitted any consideration of what’s increasingly a barrier to these big global mergers, the attitude of regulators, especially regulators in Europe.

An analysis on Reuters reported that “A financial regulator from the German regional state of Hesse — which must approve the deal — said it would seek to preserve the interests of Frankfurt as a financial centre. Likewise, French regulator AMF said it would be vigilant about preserving Paris’ status.

“Once notified, European Commission competition authorities initially have 25 days to decide whether to approve a deal but can also seek an in-depth investigation that can take some months including extensions.

“The biggest danger of a failure for the deal at this point is antitrust concerns in the derivatives market, because Eurex and Liffe would have a market share of more than 90% in Europe,” said Stefan Brugger, a fund manager at Union Investment in Frankfurt. “We consider these concerns as overdone,” he added.

“US politicians were unusually quiet about the deal that would see the Big Board bought out and would put more than 40% of US options trading under one roof.

New York mayor Michael Bloomberg, the first major US public figure to comment, said he supported the plan. “It’s going to give us access to Europe, and the Europeans access to the States in a way that our competitors, like London, will not have,” he told reporters in New York.

Was that Bloomberg also talking like the owner (in a blind trust) of the Bloomberg financial services group?

Seeing the European and German regulators (not to mention others in China and Japan) opposed the recent attempt by BHP Billiton and Rio Tinto to merge their WA iron ore operations (and get a massive $US5 billion in savings), the power of Europe’s competition overseers to block these smaller, deals has been completely overlooked in Australia. These European deals directly involve major financial centres such as Frankfurt and London giving up some of their dominance and self importance.

And if BHP couldn’t takeover Potash Corporation in the Canadian boonies, will the Canadian government (which blocked BHP), also stop the Toronto Exchange from getting into bed with London?

Finally, there’s the profits question. At least The Economist article pointed out that more than cost savings were needed to justify the deals. That’s profits to be made from running a business, just like the companies listed on the various exchanges (such as BHP, or Rio).

The Economist wrote that the previous round of deals from 2004-06 had resulted in the destruction of shareholder value: ”

Everyone talked breathlessly about the critical importance of “24/7 global pools of liquidity”, which didn’t really mean anything but proved to be an excellent chat-up line. The New York Stock Exchange wooed Euronext, a big Paris-based operator; NASDAQ bought OMX, a Scandinavian firm; Chicago’s two big exchanges merged; and in 2007 the LSE itself did a deal, buying Borsa Italiana. The result for shareholders, predictably, was lousy. Bloomberg’s index of global exchanges remains 42% below its 2007 high (global equities are about a fifth below their peak). The sales and profits of the big exchanges in rich countries have stagnated since, too.”

And there’s one other figure that ought to cause the weak levels of interest, especially in the US, from retail and other investors. Reuters reported that on Friday the volume of shares traded on the US stock markets as a whole was 7.7 billion, down from the 8.47 billion a year ago (which was in turn lower than in 2009). The current weak level is despite the 27% surge in the US market (the Standard & Poor’s 500 Index) in the past five months, a boom if you have ever seen one.

And finally, local scribblers should take a look at the announcement by US food giant, Kraft Foods last week in which it downgraded its 2011 profit growth forecast.

Kraft cut its target for earnings growth in 2011, citing “weak consumer and category growth” and “significant” increases in input costs.

“The company, which makes brands from Philadelphia cheese to Cadbury chocolate, said (on February 10) that it now sees its operating earnings per share rising by 11%-13% — down from a forecast made in November for “mid-teens” growth in 2011.

“Kraft announced its lower forecast as it reported its fourth-quarter results. The company’s diluted earnings per share stood at $0.31, down from $0.48 in the fourth quarter of 2009, on the back of costs linked of the integration of Cadbury into the business. Fourth-quarter net earnings were down 23.1% at $547m. Kraft’s operating income increased 2.2% in the fourth quarter to $1.24 billion.”

Hardly a ringing endorsement of the bid and its success.

Now didn’t Kraft last year spend more than $US21 billion taking over Cadbury in a bitter deal, in which hundreds of millions of cost savings (them elusive synergies) were promised? In fact $US675 million in annual cost savings were promised, and yet the costs of the Cadbury takeover, plus higher raw material costs (from soaring commodity prices) cost Kraft about $US500 million in lost profit in the fourth quarter. That was also despite a 1.9% price rise on all products across the world in the fourth quarter and a lower tax rare.

Excluding Cadbury, the company’s earnings were flat on a year earlier, despite higher revenues. Sounds like another value-destroying merger is under way, just as all the international exchange deals have been. And the ASX-Singapore Exchange deal will be no different.

Peter Fray

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