The proposal merger between the Australian Stock Exchange (ASX) and Singapore Stock Exchange (AGX) was announced by the CEOs of both companies on Oct 25, 2010. Since that, it has already been under pressure from Australian politicians - whose approval is necessary to lift a 15 percent shareholder cap - as it was seen as ceding control over a key national institution and a de-facto monopoly. On April 11, 2011, The Australia Treasurer blocked the deal base on that it is not in the national interest. The reasons were in order to protect Australia's financial architecture, enhance the country's standing as a financial services centre in Asia, boost access to capital for Australian businesses and support growth in high-quality financial services jobs. In addition, due to fears about losing control of Australia's clearing and settlement systems, it was the first time the Australia government has rejected a major foreign takeover on national interest grounds since 2001 when Royal Dutch Shell's bid for Woodside Petroleum was blocked. The death of the deal has sparked criticism from business leaders and many commentators in Australia. People who supported that the deal agreed by the two exchanges to cut costs, increasing competition from alternative trading platforms and avoid being overtaken by North American and European exchange mergers. In my opinion, the issue is all about efficiency and integrity of the market rather than any nationalistic instinct. It needs a more objective way of deciding whether a proposed merger is good or bad for Australia, rather than relying on the vagaries of political process.
2. The reasons for blocking the deal
First, Singapore government owns a 23.5% stake in the Singapore Exchange (SGX), which potentially undermining Australia's position as a regional financial hub. As Swan said 'it is not a merger but a takeover that would see Australia's financial sector becomes a subsidiary to a competitor in Asia. Jobs and expertise would have flowed to Singapore, and with them Sydney's efforts over decades to become a genuine international financial centre.'
Second, the takeover would jeopardize the stability of Australia's financial system since the ASX is the sole operator of the country's clearing and settlement functions. Essentially, the ASX acts as a third party - an intermediary between the buyers and sellers of shares, wearing the risk between the time a trade is executed and the time it is settled.
Third, the opponents of the SGX/ASX takeover claimed the tie-up would not improve Australia's access to Asian financial markets. A merger would result in the ASX becoming subsumed by a smaller regional exchange that is also a competitor, they noted, claiming the move would end Australia's ambitions of becoming a financial centre. Like Australia, the Singaporean government is pushing to export financial services and to become a regional financial hub.
Moreover, the ASX ranks 11th in size in the world with A$1.5 trillion worth of listed companies, whereas the SGX ranks 21st at A$0.672 trillion. Australia is ranked seventh in Asia in terms of liquidity with a turnover rate of about 125% per annum, whereas Singapore ranks 12th with a turnover rate of a much lower 75%. "What chance would ASX have to become a major regional hub if its trading platform was controlled by an exchange that has implemented designs which make it one of the world's most illiquid exchanges?" asks Professor Peter Swan
3. Criticisms on the decision
People criticized that the decision would result in reducing the global competitive of ASX. Stock exchanges around the world are merging to stay competitive. More than $20 billion in acquisitions have been announced in the past five months as companies in North America, Europe and Asia try to cut costs and boost revenue from trading in stocks, options and futures. Frankfurt-based Deutsche Boerse AG and NYSE Euronext agreed to merge, while LSE said it would buy TMX, owner of the Toronto Stock Exchange.
In addition, ANZ's chief executive Mike Smith said that it would make it more difficult for Australia to attract foreign investment. At the time the takeover was announced, the companies said they expected that the combination would result in annual cost savings of $30 million and create opportunities for new products and services. They expected to be able to implement the agreement during the second quarter of 2011.
Furthermore, supporters of the takeover also disagreed with the treasurer's "clearing house" issues, blaming Wayne Swan for not taking action to split out the ASX's clearing and settlement systems while the Singapore bid was on the table. "A lot of exchanges across the world do not own the clearing and settlement systems. There is a lot of speculation about the need for the Australian government to step in, in times of crisis. Apparently the government does not have that ability now," said Mark Nathan from Arnhem Investment Management.
Last but not least, whether this takeover is in the national interest. Professor Ian Harper helped the ASX structure its proposal. He argues the takeover is in the national interest because it will 'open the pipe or channel between the Australian financial markets and the markets in Asia, and that's something that we really seriously need done.' However, there are two problems with his argument. The first is it presumes Asian investors and fund managers would invest in Australian equities if traded on the Singapore Exchange but are too unsophisticated to invest directly in the same equities through the ASX. The second problem is that the SGX is not a gateway to Asian money. It has failed to substantially tap into Chinese capital. As successful as the island state has been, its exchange is relatively small, with half the capitalisation of Australia's, and it is essentially a local, not a pan-Asian, exchange.
4. My point of view on the decision
The issue is all about efficiency and integrity rather than any nationalistic instinct. There has to be a more objective way of deciding whether a proposed merger is good or bad for Australia, rather than relying on the vagaries of political process.
Decisions must be assessed in terms of how the proposed changes will affect the efficiency and integrity of the market, the universally acknowledged mandate of securities regulators, including corporate regulator, the Australian Securities and Investments Commission (ASIC).
ASIC has a mandate to ensure that whenever a market design change is contemplated - such as the Australian-Singapore merger that it passes the dual tests of market efficiency and market fairness. This is the central function of securities markets and that is what the government and its advisors should be trying to assess.
5. Conclusion
To some extent, cost savings, more competitive advantage than other exchanges may achieve if the proposal merger between the Australian Stock Exchange (ASX) and Singapore Stock Exchange (AGX) proceeded. However, the decision was taken national interest into consideration such as stabilize Australia's financial system, promoting Australia as a financial services centre in Asia, boost access to Asian capital market, support growth in jobs and protecting losing control of Australia's clearing and settlement systems. In my opinion, the issue needs to be further examined in term of market efficiency and integrity and more objective assessments are required by different group of government regulators.
