Trouble Merging Singapore, Oz Stock Exchanges

♠ Posted by Emmanuel in at 10/28/2010 12:00:00 AM
Well this is a way to douse excitement over frantic mergers and acquisitions activity in the Asia-Pacific. Just a few days ago I was all excited about Singapore Exchange's (SGX) proposed takeover of Australia's largest stock exchange, the Australian Stock Exchange (ASX) in Sydney. After the initial euphoria over creating further economies of scale (more companies being traded on the same platform can help reduce transaction costs for investors) and scope (more financial products can be availed of to meet investors' needs), we come crashing down to the reality of a bare-knuckle political contest brewing down under.

Once more, protectionism comes in the form of examining the "security" implications of such a takeover. Being a small, open economy with no history of foreign interventionism, it strikes me as unlikely that Singapore is any threat to Australia. But leave it up to the politicos to think of something. The national interest can be defined in ever so many woolly ways, and that's where it's at right now. Like other foreign concerns taking a controlling interest in Aussie firms, SGX will need to gain clearance from regulatory agencies if it is to raise its stake in ASX over 15%. Moreover, Labor's coalition partners may not be as sanguine about the proposed deal as many in Julia Gillard's party even if Treasurer Tony Swan approves of the Singaporeans' proposed governance structure for the combined stock exchange. From the WSJ:
A political backlash threatens to derail the proposed $8.3 billion takeover of Australia's largest stock-market operator by Singapore Exchange Ltd. Key lawmakers signaled they may block the deal because it gives a foreign investor too much control of the Sydney-based exchange. Meanwhile, the president of Tokyo Stock Exchange Group Inc., which owns 4.99% of the Singapore exchange, criticized the deal. "As the second-biggest stakeholder in SGX, we are not happy that the move would cause big dilution to our holdings," Atsushi Saito said at a regular monthly news conference. The TSE's holding would be diluted to about 3.1%, he said

Politicians on both sides of Australia's Parliament questioned the takeover of ASX Ltd., which requires the approval of both the government and regulators to go ahead. Under Australian law, no single shareholder can own more than 15% of the ASX, and any regulation to lift that threshold must be considered in Parliament for 15 days.

Singapore "is a state that tramples all over freedom of speech, democracy, the rights of oppositions, the ability for public discourse," said Bob Brown, leader of the Greens party. "The proposal here is that effectively the Australian Stock Exchange in Sydney be subjugated to Singapore and we'll see it wither on the vine," he said. The support of the Greens party is crucial to Prime Minister Julia Gillard's minority Labor government.

Mr. Brown's concerns about the takeover, which could create Asia's fifth-largest market operator, were echoed by senior political figures, including the shadow treasurer for the opposition Liberal-National Party coalition, a clear sign the deal is becoming a political issue. "There will be concerns about our stock market being bought by a regional competitor, so it's essential the government explain how this is good for Australia," Joe Hockey, shadow treasury spokesman, said in a statement to Dow Jones Newswires.

The remarks from the opposition camp prompted Trade Minister Craig Emerson to call on lawmakers to take a step back and allow a "proper process" in which authorities make their assessment "free of this sort of political chicanery and posturing." Mr. Emerson, who will travel to Singapore next week on government business, said Australia must let the regulatory process take its course, allowing authorities to make their judgments "independently of interference by the political parties."

SGX has offered 22 Australian dollars (US$21.78) in cash and 3.743 SGX shares for each ASX share, valuing the company at A$48 a share, based on the closing price before the offer was announced. ASX shares closed down 7.4% Tuesday, weighed down by concern that a political backlash could derail the deal. J.P. Morgan Chase & Co. warned Tuesday in a note to investors that the deal risks becoming "a heavily politicized issue."

The chief executives of both ASX and SGX have said they want to break down national boundaries and form an Asian-Pacific powerhouse with more than 2,700 listed companies from about 20 countries. The exchanges already have started their campaign to woo regulators and politicians. Executives from ASX are due to meet with Mr. Hockey this week.
So there went my dreams of consolidation among bourses in the Asia-Pacific? It certainly put others on the alert that mega-exchanges like SGX + ASX might be able to woo IPOs with promises of greater market-making:
Hong Kong Exchanges & Clearing Ltd. Chairman Ronald Arculli acknowledged that the merger would pose a threat to Hong Kong's competitiveness for new listings. "All of us are out there competing," he said in a phone interview, but "there will be occasions when a company decides Australia and Singapore is the place for them."

Amid calls for close scrutiny of the deal, Australian Treasurer Wayne Swan told Parliament that the deal should also be viewed in terms of building "Australia's reputation as a financial-services hub." He also said that SGX's takeover will undergo intense regulatory scrutiny to ensure Australia's interests and the market integrity of ASX are preserved. "Regulators on both sides would need to look into any regulatory issues and be satisfied that the proposed transaction meets regulatory requirements in their jurisdiction," a spokeswoman for the Monetary Authority of Singapore said in a statement. The Financial Sector Development Fund, which is administered by the monetary authority, controls a 23% stake in SGX.

Even if the deal clears the regulatory hurdles, a closer inspection of the offer may prompt ASX shareholders to demand a higher price or even open the door to a rival bidder, analysts say. "Due to the structure of the deal, ASX shareholders are being asked to bear substantially more leverage—SGX/ASX will be the most-leveraged global exchange—as well as risk around delivery of synergies," Macquarie Research said.

The Australian government may struggle to convince some hard-liners such as independent lawmaker Bob Katter, who plans to present a motion in Parliament to oppose the takeover of the ASX by a foreign investor. "I do not wish to live in a country of serfs working for foreign landlords," he told Dow Jones Newswires.
Serfs working for foreign landlords...and non-white ones to boot, it goes without saying? It seems all too much for certain current coalition partners. Indeed, Labor may be better off banking on support from the Conservative opposition, but it's not a sure deal:
A cloud hangs over the deal in Australia's parliament, where a minority Labor government is relying on support from a handful of Green and independent lawmakers. The Greens and at least one independent are hostile to the deal, with one calling it "lunacy on a grand scale". Most of the concerns centre on foreign control of the Australian exchange, although the Greens also question Singapore's commitment to democracy and free speech...

If the Treasurer decides the deal does not damage national interests and agrees to lift the 15 percent shareholder cap, ruling Labor should in theory be able to clear any parliamentary hurdles with conservative opposition support. That assumes the opposition -- usually pro-business -- did not stand in the way of the merger. But the opposition could fuel nationalist sentiment on the deal to turn a political blowtorch on the government, which continues to struggle in opinion polls.

Prime Minister Julia Gillard's Labor and the conservatives both aim for Sydney to emerge as an Asia-Pacific financial centre, but will need persuading that a merged SGX-ASX would strengthen, rather than weaken, Australia's ambitions. The conservatives and the Greens combined would have the numbers to kill the deal.
This is one for Asia-Pacific watchers to follow.