This week we will look at the Singapore Stock Exchange’s (SGX) $8.6 billion bid for the Australian Stock Exchange (ASX), announced this past Monday. This is an interesting deal, because a merger of stock-exchange operators is not as intuitive as the combination of two widget-makers.
Let’s get the technical details out of the way: SGX plans to pay a 37% premium of 10.7 Singapore dollars in cash and shares for ASX, whose board recommended the merger. That was painless. I could break it down in a million other ways, but that’s a waste of space. Check out the press release for additional details.
What exactly do exchanges do? As strange as it sounds, stock exchanges have strategies. After all, they are businesses. It’s just hard to conceptualize because they don’t produce a tangible product per se. In fact, they primarily serve to offer liquidity and establish a semblance of order in otherwise highly fragmented, inefficient, and illiquid markets. The problem is, as technology progresses in leaps and bounds, many of these lumbering giants face significant competition from more nimble alternative trading platforms.
You can bet SGX and ASX want to make sure that they a big enough bite of this growth in Asia, and what better way to do so than expand the diameter of their mouth through this business combination!
Times are a-changin’ in Asia: financial markets, particularly in stocks, options, and futures, are growing faster in Asia than in the US and Europe. However, much of this growth is filtering through more efficient and technologically savvy exchanges. Dark pools, anyone?
While traditional Asian market exchanges benefit from the lack of Western regulations, such as US Regulation NMS, which aimed to end the era of anti-competitive exchange practices, investors still want lower trading costs, which these exchanges aren’t so great at providing. Some jurisdictions have already removed monopoly protections, while rival trading platforms such as Chi-X are planning to move into Australia quicker than ASX can say, “government lobbying.”
If you think about it, this situation mirrors elementary school recess. Everyone remembers that one kid who was really popular for no particular reason, save that his family owned three BMWs, a big house, and a swimming pool he claimed was full of money. After everyone realized Mr. Popular wasn’t really that fun or cool, he started to panic. Plus, the new kids on the block brought awesome computer gadgets to school and started to raid Mr. Popular’s turf, which was not okay on Mr. Popular’s watch.
In our case, the Singapore Stock Exchange’s trading volumes declined 40% since 2007, while Hong Kong’s rose by a similar amount. Meanwhile, the Australian Stock Exchange faces tough future competition from smaller rivals. To top it off, both exchanges significantly underperformed their benchmarks in the past year.
Asian stock exchanges such as SGX and ASX have plenty of anti-role models, and want to make sure they adapt to change before it kicks them down the stairs. For example, in recent years the London Stock Exchange spent a great deal of time and money on lobbying to prevent the inevitable growing influence of its smaller, more efficient competitors. At the same time, it stuck its nose up at any merger suggestions.
In that game of musical chairs, the London Stock Exchange figured it could get the government to reserve a seat, but when the music ended, its rivals plopped right down instead, and there wasn’t a whole lot London could do about it. It lost 45% of its trading share. Chi-X (the one that’s going down under!) was partly behind this, which does not bode well for a lone ASX. What’s an exchange to do? Let’s check back in with Mr. Popular, who might have a brilliant strategy.
Mr. Popular now faces a dilemma: he could try to reestablish his coolness by himself, which is an uphill battle, or he could pair up with Miss Popular, who had been experiencing similar issues with her minions. He thinks she’s kind of cute, and isn’t clingy, so it could work!
It looks like SGX and ASX are using this strategy: by merging the fifth-largest and eighth-largest Asian exchanges, the two hope to stop the continuous exodus of their court from their lunch table to eat with the new kids on the block, those annoying dark pools and technically savvy trading platforms! Question is, are Mr. and Miss Popular compatible, and will they be able to combine their strengths to halt their demise? Just because they’re both popular, doesn’t mean they’ll work well together!
In the case of SGX and ASX, it’s hard to say whether their plan will be effective. They would end up controlling 12% of publicly listed companies in the region, and their combination will provide them with significant cost savings. Both companies utilize the same technology platform, and since rumors of the deal hit the market, both companies’ stocks are performing a bit better. Plus, both exchanges have been aiming to steadily improve on their own.
SGX’s got a new strategy, which it dubbed “the Asian gateway.” In fact, under this plan SGX has tried to improve its relationships with other exchanges. For example, it expanded its cooperation agreement with Nasdaq OMX a week ago to allow companies to list on both exchanges. It’s even working on launching a “dark pool” joint venture with Chi-X! As the old adage goes, if you can’t beat ‘em, join ‘em! In addition, ASX has upgraded its trading technology to try to prevent high-frequency traders from going elsewhere.
Some journalists see this deal as a spark that will ignite a series of exchange consolidations, while others feel it’s politically infeasible. The Australians will definitely want some of their people to have a say through the board and management in this newly consolidated company. After all, ASX has been a virtual monopoly until Chi-X was granted preliminary approval for a market license by the Australian government. That must have been a rude awakening, and perhaps representative of why ASX is so enthusiastic about the merger.
In any case, the deal still needs to overcome a few hurdles, including approval by Australia’s securities authority and some way around Australia’s 15% foreign ownership cap.
Until then, I’m with the new kids on the block. No matter what SGX, ASX, and any other traditional stock exchange tries to do, the competition will get stiffer, and when the music ultimately stops (which could take a decade, who knows), eventually the exchanges will get kicked out of the game.
Disclosure: No positions in the stocks mentioned.