STORM: What the ASX bid says about Singapore

STORM, April 2011

Singapore Exchange (SGX) is about to find out if its audacious bid to take over its counterpart in Australia will go through. Getting there will require it to win over a hostile and suspicious Australian public who don’t like the idea of losing a national icon to a foreign buyer.

But whether it succeeds or not, chief executive Magnus Bocker’s bid has cemented the sense that Singapore’s exchange, having grown as much as is practical at home, must strike out overseas in order to move forward.

In that respect, it mirrors the country itself: no natural assets to exploit, and too small to thrive on home-grown business, so built on the back of other people by servicing their trade and being a go-between, riding on the back of domestic growth in far bigger countries by making life easier for their merchants.

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And so it is with Singapore Exchange. Actually, the SGX bid is only the natural conclusion of a trend that has been underway for a decade or more. Singapore has, over the years, built some outstanding national champions in its corporate and banking world. But, barring the Port of Singapore Authority, they are pretty much all now listed already. Many years ago the exchange’s executives realised that in order to grow any further, they would have to become a regional hub and attract companies from overseas to list there too, because Singapore was just too small to grow indefinitely off its own domestic growth. This became known as the Asian Gateway strategy, and it is going from strength to strength.

By the end of 2010, 40% of Singapore’s companies by number, and 47% by market capitalization, were foreign – and that’s just the start. Lawrence Wong, the head of listings, says he hopes that within a few years the percentage will top 50%. It’s already on its way: of the five new listings that closed their offers in January, only two were for Singaporean companies; the others were a Chinese property developer from Xiamen, a Thai natural rubber processor and a Malaysian tin smelting operation. And by far the most eagerly awaited listing of the year so far is Hutchison Ports – from Hong Kong. That might well prove to be the biggest listing in Singapore all year.

And so, like the country it represents, the exchange is growing by going regional. “We are a microscopic version of Singapore,” Wong says. “If you look at Singapore per se, we can never produce the kind of GDP [on our own], so we keep reaching out. The exchange is doing the same.”

When the exchange hired Magnus Bocker as CEO last year, it did so knowing that he came with a particular reputation and strength. Bocker had started out with a company called OM Technology in Sweden which operated the Stockholm stock exchange. In 2003, when he was deputy CEO, OM merged with a company called HEX Integrated Markets, which ran the exchanges of Finland, Estonia and Latvia. It was to be the start of a breakneck series of mergers that Bocker, who swiftly became CEO, would pilot: exchanges in Denmark, Lithuania, Iceland, Norway and Armenia, before he sold the whole consolidated business to Nasdaq in 2008 and became its president. By his own count, the Australia bid is the 10^th attempted merger he’s been involved in.

When you talk to Bocker, his language is that of process, efficiency, operations. While he understands the emotional connection to exchanges – they do, after all, tend to be housed in historic buildings and represent a certain national standing – he is unemotional about them himself, thinking of them purely as servants to the markets and its participants. Europe, which at one stage had 40 exchanges even as most of the countries themselves were consolidating to a single currency, clearly needed consolidation, and Bocker sees the same trends coming together in Asia. “Asian financial markets a decade from now will be more than half of the world’s financial markets,” he says. And he believes Singapore has the market, regulation, infrastructure and willingness to adapt to be the senior financial centre.

If his ASX bid goes through, the combined company will have pro forma revenues of US$1.1 billion before tax, be the second largest listing venue in Asia Pacific, have 2,700 listed companies, the largest sectors for real estate investment trusts and exchange traded funds in the region, the widest range of Asia Pacific derivatives, and technology that stands up to any competitor worldwide.

That heft is becoming increasingly important: in the months since the bid was first announced, the London Stock Exchange has agreed to merge with its counterpart in Toronto, while Deutsche Borse and NYSE Euronext are likely to join forces to form the largest exchange platform worldwide. The world’s exchanges are increasingly grouping into a handful of aligned and merged blocs, pooling liquidity, serving an inter-connected planet. This wave of M&A has much further to run and Bocker wants to be at the forefront of it.

But is something lost along the way in all this?

Few countries are more of a brand than Singapore is. That might not be obvious on the ground, but from a distance, it’s true: the Singapore Inc label makes a lot of sense. Its business acumen and open-market policy is a brand. Its cleanliness and civil obedience is a brand. The peerless functionality of the MRT is a brand. Singapore stands for certain things, particularly in the international business world: ease of process; strength of infrastructure; accommodation of regulation; and, to be frank, no likelihood of democracy effecting political change.

SGX, too, is a brand, and it has built a world-standard position as a top-notch exchange from the perspective of technology, infrastructure and regulatory environment. But there is a risk that as more and more non-Singaporean companies become part of the SGX family, that brand is cheapened.

This is nowhere more true than in the S-chip world. S-chips were born out of a perceptive observation: that there was a whole world of emerging mainland Chinese private sector companies, built by entrepreneurs, that could not get access to capital in Hong Kong because that market was swamped with state-owned behemoths like the mainland banks, energy and telecommunications companies, who would raise billions of dollars at a time and suck not only the money but the attention of investors from the market. Singapore stepped in and served a need: and by now, over 150 Chinese companies in that bracket have come to list in Singapore.

Some have done very well. China Fisheries is a current market darling; Cosco and China Merchants have performed well for investors too. Some people really do get in on the ground floor of a rapidly rising elevator, and do very well. But the roll call of companies that not only do not do well, but outright fail through incompetence, bad governance or even fraud, has become embarrassing.

FerroChina. FibreChem Technologies. Oriental Century. Zhonghui Holdings. Sino-Environment. China Sun Bio-Chem. Beauty China. Celestial. China Milk. All have been suspended or delisted for one reason or another, some for accounting irregularities, some for defaults. And in very few situations have Singapore investors got any money back. Take China Milk: loved by institutional investors when it listed in 2006, this upstream dairy producer – that is, bull semen and cow embryos – won over names like DBS Asset Management, JF Asset management and Dubai Investment Group with its bold plan to revolutionise the Chinese dairy herd with Canadian cows and bulls. Yet in January 2010, faced with calls on a convertible bond, it said it was experiencing a brief delay remitting funds from the mainland; the following month it was suspended. Its last announcement was in October, since when its web site has been shut down, and there is no indication of it ever coming back. Yet who can the shareholders complain to? A closer look at the company reveals that it has no office and no assets in Singapore to pursue, just two independent directors who have no real power. It is domiciled in the Cayman Islands and its assets – a load of cows – are all in China.

SGX takes great pride in the level of vetting it does before letting companies list, and in the monitoring it conducts while companies are on its market. And, in fairness, six or seven Chinese delistings clearly do not represent a majority in a market of 150. But they do represent a reputational problem, and they demonstrate loud and clear the flip side of seeking listings from far and wide.

The Australia bid doesn’t fit into this category, for several reasons. For a start, the ASX has world-class standards of supervision as well as technology: it is, in many respects, quite similar to the SGX. Also, what’s been proposed so far is a merger at the holding company level, not a merger of the actual exchanges, which will remain separate, just with greater links between them (such as a so-called passport scheme for the biggest companies, making it easy for investors on one exchange to buy the big stocks on another). SGX-ASX is a bid played out on an altogether different field: one of global alliances, combined liquidity, and technological efficiency.

But the ASX situation does raise an interesting point of difference which speaks to the issue of whether Singapore is cheapened by its regional ambitions.

To some, it seems odd that a stock exchange can be listed on itself. In fact, these days, it’s increasingly commonplace, and has been done all over the world. But it creates one difficult situation. Stock exchanges are supposed to regulate the companies that list on them, and to make sure they impose high standards in terms of who they allow to list. But as a listed company, a stock exchange exists to make profits for its shareholders – and to do that, it’s in its interests that it allow as many companies to list as possible.

“It is a conflict of interest to be a for-profit regulator in any field,” says David Webb, the Hong Kong-based commentator and governance advocate, speaking about exchanges generally. “There is a short-term incentive to lower standards to attract listings, and to cut regulatory costs to boost profits.”

Different exchanges have dealt with this in different ways. When the London Stock Exchange listed, its regulatory functions were moved out and put into the Financial Services Authority. In Australia, regulatory functions were moved out in two stages after demutualisation, so that while the ASX remains the front-line regulator, it then also has various functions supervised by the Australian Securities and Investments Commission. But at SGX, as in Hong Kong, the exchange is also the regulator.

SGX says its policies internally prevent a conflict: that nobody on the listings side could compel someone on the regulatory side to allow a listing through. But perhaps if Singapore is going to continue to embrace the rest of the world’s companies in order to build market size and listing fees, it would look better – even if it doesn’t make much difference in practice – to move regulation out completely to the MAS.

SGX is the perfect sort of institution to thrive in this new global world, just as Singapore itself is the perfect nation to capitalise on a globalised planet with ever-growing flows of people and trade. It is smart, sophisticated, and crucially willing to change. Its policies have put it among the drivers in a period of consolidation that could, in time, reshape the region just as it has reshaped Europe. But nothing comes for free. Just as Singapore itself fears the changes to its identity that come with increased foreign immigration, its exchange’s character and brand are going to be changed too as it becomes a regional rather than a local place.