Just a week after its launch, the Singapore Exchange’s $8.3bn takeover offer for the Australian Stock Exchange is looking increasingly unlikely to be consummated, amid rising nationalist sentiment in Australia.
As the two exchanges ponder the bleak prospect of months of regulatory debate followed by rejection, supporters of exchange consolidation are consoling themselves with the reflection that the bid has at least put the issue on the table.
However, almost no one in the region thinks anything much is likely to happen in the short term, given that the SGX bid does nothing to dilute the enormous cultural, political, legal and geographical differences that have kept Asian exchanges apart.
The agreed offer is the fourth largest on record for a securities exchange, according to Thomson Reuters, and the first attempt to merge two major bourses in the Asia Pacific region. Crucially, though, the deal is dependent on both regulatory and political approval in Australia.
The key difficulty is that a ceiling of 15 per cent on individual share ownership of the ASX can only be lifted by a parliamentary order, potentially forcing the Labor government to try to ram unpopular legislation through a parliament in which it does not have a majority.
Much of the criticism is centred on the Singapore government’s ownership of a 23.5 per cent non-voting stake in the SGX, which is administered by Temasek, the island state’s national investment agency.
Amid a torrent of criticism of Singapore’s political system and civil rights record, Temasek was on Monday prompted to issue a statement to the Australian media denying that it takes its orders from the government, or that it gives orders to the Singapore Exchange.
In spite of the furore, some financial markets experts say the deal remains a logical pairing, and that it will encourage other exchanges to forge alliances as they seek to gain scale to compete with growing competition from alternative trading platforms such as Chi-X Global.
“With consolidation in the execution space occurring in both Europe and the US it is inevitable that Asia is following too,” says Simmy Grewal, an analyst at the US based Aite Group, which specialises in markets and trading issues.
One point being made behind the scenes is that the consolidation process in Europe was catalysed by a failed merger between Germany’s Deutsche Börse and the London Stock Exchange, which was followed by several failed tilts at the LSE by Nasdaq, the US exchange.
A senior Asian financial regulator, speaking unattributably, says the failed offers paved the way for later deals that eventually created cross-border giants such as NYSE Euronext and Nasdaq OMX. The SGX bid could have a similar impact in Asia, even if it collapses, by demonstrating that such mergers are not impossible, he says.
However, it remains unclear how the SGX bid would contribute to this process in practice, given the continuing uncertainties about how it would pool capital while retaining two discrete exchanges quoting stocks separately in different currencies.
Srikanth Vadlamani, analyst at Nomura in Singapore, says there is little indication that the merged entity would be able to capture market share from other Asian exchanges, particularly Hong Kong, the market leader.
“For institutional investors, access to both these markets is already pretty easy, and we see little incremental benefit,” says Mr Vadlamani. “It may indeed make it easier for retail investors to access the other market, but we do not think retail investors are a material part of the cross-border investment base.”
Attempts to follow the SGX model would be hampered by similar obstacles to those that protect the ASX, including government ownership or regulations restricting foreign ownership. Hong Kong, for example, is likely to be off limits for bidders because individual shareholders are limited to 5 per cent holdings.
Even where exchanges can be acquired, the financial problems are substantial. Alexander Yavorsky, a senior analyst at Moody’s, says the SGX offer “heightens the urgency” for exchanges, but rules out large-scale acquisitions because of the high valuations of Asian exchanges.
These make stock-based deals highly dilutive for existing shareholders, he says, while debt financed deals would in many cases take acquirers beyond their borrowing capacity, potentially leading to ratings downgrades that would damage their clearing franchises.
That leaves a variety of more limited arrangements on the table for any exchanges that are interested in cross-border arrangements, including the kind of minority equity links that the SGX has established with both the Tokyo Stock Exchange and the Bombay Stock Exchange.
None of these has yielded significant synergies, but they are much easier to achieve than more extensive deals that challenge the Asia Pacific view of stock exchanges as symbols of national sovereignty.
Niki Beattie, managing director of Market Structure Partners, a consultancy, says consolidation may happen among exchanges within the larger Asian countries, but is unlikely across national borders for the time being.
“The smaller Asian markets – Malaysia, Thailand – will be concerned as they are likely to see Singapore as their greatest opportunity to do a deal in the region, but I think they are still too disparate,” she says.
“Maybe they will start to explore some joint ventures and harmonisation in the face of a deal like this, but I don’t see a great rash of consolidation.”
Additional reporting by Jeremy Grant
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