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Issue #1481      17 November 2010

Singapore Stock Exchange takeover of ASX

Brave new world of competition (Part 2)

The Singapore Stock Exchange’s (SGX) $8.1 billion proposed takeover of the Australian Securities Exchange (ASX) Board involves the sale of ASX shares for a combination of cash and SGX shares. It effectively valued ASX shares at $48 on market prices at the time of the announcement. The market price at the time was $34.96 – putting the offer at 37.3 percent above market values. Not surprisingly ASX shares quickly rose by around 20 percent. The big end of town, who realised that there were considerable hurdles to jump, wasted no time in offloading their ASX shares at a handsome profit while smaller investors bought them up in the belief they might be on a winner.

There certainly are a number of hurdles to be jumped. Before Treasurer Wayne Swan can give his blessing to the takeover, he must first receive advice from the Foreign Investment Review Board. Regulatory approval is required from the Australian Securities and Investments Commission (ASIC). Approval must be gained under the Corporations Act to waive the 15 percent limit on share ownership before SGX can purchase ASX shares. Shareholders of both exchanges have to vote on the deal. There are regulatory requirements in Singapore and other technical matters to be dealt with. The largest hurdle is the political one; getting it through Parliament.

A number of economic commentators have questioned the apparently high price being paid by SGX, raising questions about the SGX’s longer term intent. The new ASX-SGX Group will also carry a significant debt as a result of the money raised by SGX for the part-payment of SGX shareholders ($22 a share).

The ASX-SGX statement offers some insight into the aims of the takeover and future directions. It says that together the two exchanges offer access to:

“... second largest listing venue in Asia Pacific with over 2,700 listed companies from over 20 countries, including over 200 listings from Greater China….

“Asia Pacific’s largest and the world’s second largest base of institutional investors with combined assets under management of over US$2.3 trillion from existing superannuation, institutional and sovereign wealth funds…”

(The savings from the millions of small investors add up to relatively little compared with the institutional investors mentioned above.)

The two boards clearly see the larger combined exchange as being far more competitive internationally. This is in line with Treasurer Wayne Swan’s thinking. His aim is to make Australia a financial hub in the Asian region. The government has concerns about the growing domination of the China’s exchanges in Hong Kong, Shanghai and Shenzhen. Swan can be expected to approve the takeover, and no doubt would have already been consulted prior to the announcement.

The ASX-SGX statement also indicates future directions: “The combined group will also enhance its attractiveness as a partner of choice for future exchange industry collaboration and consolidation opportunities to tap into strong regional growth.” Consolidation could involve takeovers or mergers.

What is happening in Australia reflects a process taking place in other stock markets around the world. There are four stages. The first is the merging of small domestic exchanges into one central exchange. The second is the privatisation of mutuals or government owned exchanges. The final two stages involve mergers and takeovers, and the entry of competitors. The processes for the next two stages are underway now in Australia with the SGX takeover and the expected entry of a competitor in 2011.

Competition and monopolisation

At present the ASX is a monopoly, but next year could face competition from a subsidiary of Chi-X Global-Chi-X Australia which was given in principle approval earlier this year by the Rudd government to operate a securities exchange in Australia. In other words, Swan has already agreed to the entry of competitors on the Australian share and futures markets.

According to the World Federation of Stock Exchanges, the proportion of for-profit stock exchanges rose from 38 percent to 75 percent between 1998 and 2006. The process of demutualisation and privatisation of exchanges has seen a transfer in the ownership and control of exchanges from brokers and governments to the largest global monopolies, in particular the global financial institutions.

This is very evident in the makeup of the consortium that owns Chi-X Europe (another of Chi-X subsidiary operating across Europe). The consortium includes BNP Paribas, Citadel, Citigroup, Credit Suisse, Fortis, GETCO Europe Ltd, Goldman Sachs, Instinet Holdings, Merrill Lynch, Morgan Stanley, Optiver, Société Genérale and UBS. SGX board connections include Lloyds Bank, Citibank, Bankers Trust and as previously stated in Part 1, directorships held by ASX board members include ANZ, Macquarie Bank and National Australia Bank. Readers may recall a failed attempt by Macquarie Bank to the take over the London Stock Exchange in 2005.

The process of competition and expansion is illustrated by the example of NASDAQ-OMX. OMX (Sweden and Finland) built up an empire of seven exchanges based in the Nordic and Baltic countries and the Euronext was a merger of Amsterdam, Brussels, Lisbon and Paris stock exchanges. Then in 2008 the US exchange, NASDAQ bought up OMX to form NASDAQ-OMX.

Chi-X Australia promotes itself to Australian investors in this way: “Our aim is to provide traders and investors with more efficient markets through the introduction of low-cost, high-speed alternative execution venues. We believe that through the introduction of competition markets will become more attractive to the international investment community, ultimately helping to increase overall market liquidity and improve investment performance.”

Such competition and promises of lower prices means the Australian government (and other governments) will be under greater pressure to ease regulatory requirements to encourage the big corporations to list on Australian securities markets and for investors to trade in Australia.

If Australian exchanges are to become a gateway to Asia, the pressure will really be on. Competition also leads to collapses and eventually global monopolisation by a handful of private conglomerates. The process of privatisation and global monopolisation is advancing at an incredible speed.

Workers have a great deal to worry about. Stockmarkets are already riddled with manipulation and corruption and even less regulation will put their superannuation and other savings at greater risk. The proposed takeover of the ASX raises an opportunity for the labour movement to not only oppose the takeover, but to demand the nationalisation of the ASX and its establishment as an independent (as far as is possible under capitalism), not for-profit entity.  

Next article – Australia and the Great October Revolution

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