Why the SGX bid for ASX will fail

Australian Financial Review – Perspective, March 26 2011

If the whispers coming out of government this week are correct, then Singapore Exchange’s bid for the ASX is doomed. It will be a while before we know for sure – the Foreign Investment Review Board, just the first of many hurdles the bid must surmount, could potentially take months to make its recommendation even before the government makes a decision. But if true, it will represent an uncharacteristic setback for SGX’s chief executive, Magnus Bocker.

By Bocker’s own count, the ASX tilt is his 10^th merger; it could be the first he has failed to get over the line. The reason this will fail while all others have succeeded is because this bid took place in an environment wholly different from any other he has worked in – and presented new, insurmountable challenges.

Most of the mergers with which Bocker made his name took place in Scandinavia and the Baltic states, starting with the 2003 merger of OM Technology – the operator of Stockholm’s stock exchange – and HEX Integrated Markets, which ran the exchanges of Finland, Estonia and Latvia. Others would follow in Lithuania, Denmark, Iceland, Norway (a stake rather than a full merger) and Armenia.

Here’s the first difference. If you were a Finn or a Swede in 2003 then you were watching your continent being reshaped by the single currency of the euro, which had replaced the legacy currencies of 11 countries – Finland among them – between 1999 and 2002. You were witnessing a transformation in trade, in banking, in customs – in everything, really, but most particularly the capital markets. The nature of European liquidity, capital flows and the role of stock markets was changing beyond recognition. It took no leap of foresight to realize that there was just no need for Europe to host nearly 40 stock exchanges, as it did at the time.

Of course there were challenges and disagreements; Bocker says that every single merger he has worked on has involved at least some vigorous dissent. Stock exchanges are iconic, often housed in historic buildings, and everywhere in the world there is a sense of emotional attachment to them. But it didn’t take too much visionary zeal to help Swedes, Finns, Estonians and Latvians realize that there was a great risk of being marginalized and rendered irrelevant. It was unarguable. And so the momentum of the single currency pushed those deals through, even in markets which had not joined the euro but were nevertheless on the periphery of this historic period of change.

For Australians, there is no such momentous shift to explain why they should accept their own icon falling under the ownership of a distant foreigner. There is simply no comparable push for consolidation in the Asia Pacific region. Periodically people talk about a single Asian currency; it’s a challenge to find anyone who expects to see it within half a century. Instead, Asian capital is fractured and individual; there is the whole question of the internationalization of the Chinese renminbi to work through, for a start, and there is really no major equivalent of the Australian dollar in terms of its total freedom of movement and accessibility. If currency integration ever happens in Asia it will likely start with something common to the Asean (Association of Southeast Asian Nations) states such as Indonesia, Malaysia, Thailand and Vietnam, yet even there it is surely decades away.

Without that driver, it’s very hard to argue convincingly that Australia is going to be marginalized by remaining independent.

It’s true that every new merger announcement – London and Toronto, Deutsche Borse and NYSE Euronext, even Bocker’s previous deal between Nasdaq and OMX – reinforces the sense that exchange consolidation is going to continue. And at a professional level, many people see the merits in an ASX/SGX tie-up.

“My own personal view is I hope they [SGX] are successful in their bid for ASX, and that’s speaking as an Australian,” says Peter Sartori of Treasury Asia Asset Management – an Australian-domiciled fund, investing in Asia, which he runs from Singapore. “Hopefully the politics don’t get in the way. From a fund management point of view, if I can buy an Australian stock in Singapore, or Australian people can buy Singapore, that makes my job a bit easier. And it might improve liquidity.”

But people like Sartori are not the ones who need to be convinced, and it’s here that Bocker may have underestimated the challenge.

Bocker, who is a buoyant, energetic presence, is also a pragmatist. He believes in exchange mergers because, logically, they ought to happen to better serve their customers. “It never starts with the exchanges. It starts with the underlying capital markets,” he told the author in December. “A lot of my members, the banks and brokers, are trading here and also trading somewhere else. They say: can’t we have closer cooperation in order to streamline it? Money has started to go cross-border much faster than we as exchanges have helped it to do so.”

Bocker is a technology and systems man, who consistently rationalises exchange mergers in unemotional terms as being driven by efficiency. Everywhere he goes he upgrade systems: he did it soon after arrival in Singapore, and his job as president of Nasdaq OMX included responsibility for the market technology.

But the technological side of the ASX deal was never a problem, and that was not the argument that needed to be won (although there was some doubt about how much efficiency could be improved among two of the most technologically solid exchanges in the world – and, indeed, whether a merger of exchange holding companies, as opposed to exchanges themselves, really meant the single pool of liquidity that Bocker refers to in presentations about the bid). The reason the bid always looked dicey from the first day was purely political.

“I don’t doubt that Magnus did outstanding due diligence on the exchange, the systems, the numbers,” says one Australian advisor. “But did he do the political due diligence?” It’s inconceivable that he didn’t know that the bid would require a change in the law, and that effecting such a change through a government with the slimmest possible majority in parliament was always going to be a huge ask. But he seems to have believed that the logic of consolidation would be enough to surmount the challenges, and in that regard he may have erred.

It would certainly have helped if SGX had gone in with more of a ‘merger of equals’ structure than the takeover-styled bid at the outset, as Malcolm Turnbull remarked this week. The recent revisions to the bid, increasing the Australian board representation, would have been a much more palatable place to start; only reaching that concession as part of a negotiation may well have put politicians – and certainly the public – offside from the outset.

Bocker himself said in December that he was “absolutely not” surprised by the ferocity of Australian public and political response to the SGX bid, and in fact welcomed it as an essential part of the process. “It is very important that the question of national interest is raised,” he said. “If we cannot deliver more national interest by this merger we shouldn’t do it.” But it seems more and more likely that this is the crux of the argument he has failed to win.