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> SGX bid for Australian counterpart in doubt
> By Kevin Brown in Singapore
> Published: November 1 2010 17:45 | Last updated: November 1 2010 17:45
> 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.
>
> EDITOR’S CHOICE
> Lex: SGX / ASX - Nov-01
>
> TSE may consider overseas alliances - Oct-26
>
> Inside Asia: Test for regional consolidation - Oct-26
>
> Canberra’s approval the ‘key hurdle’ - Oct-25
>
> Lex: Exchange consolidation - Oct-25
>
> SGX shares slip on ASX takeover plan - Oct-25
>
> 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 sub
> stantial. 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
>