Metal exchange bid makes sense

PUBLISHED : Tuesday, 12 June, 2012, 12:00am
UPDATED : Tuesday, 12 June, 2012, 12:00am


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There is no more prominent symbol of Hong Kong's status as an international financial centre than its stock exchange. Hong Kong Exchanges and Clearing is the world's second-biggest bourse operator, the acknowledged premier market for mainland firms seeking to list abroad. It is a major company, a corporate success and a leading brand. If our city is to forge new ground in the sector, the Hong Kong exchange has to expand overseas.

HKEx's first foreign takeover bid, for the London Metal Exchange (LME), which handles about 80 per cent of the global futures trade in industrial metals, therefore makes sense. Hong Kong has no experience in commodities trading and the acquisition would usefully expand our knowledge and skills. It would diversify the exchange's income and reduced its reliance on day-to-day stock trading and new listings. Transaction costs are a major drag on HKEx's earnings.

The deal is also beneficial for the LME. It would bring it closer to China, the world's biggest consumer of commodities, opening warehousing opportunities. But the 135-year-old exchange does not come cheaply or without conditions. A rival bid by the second-largest US futures market, Intercontinental Exchange, could push the price beyond the valuation of an estimated US$1.3 billion - perceived by some analysts as excessive, given falling profits. Both bidders have agreed to keep the LME's headquarters in London, its existing board, its warehouse network and its system of establishing metals prices.

Such terms may seem unattractive - streamlining and merging operations to make them more profitable is a key reason for an acquisition. With the Hong Kong government being HKEx's biggest shareholder, taxpayers would seem to have all manner of reasons for caution. But the exchange's position is threatened by the expansionist mindset of competitors, notably the Singapore and New York bourses. While any takeover deal has to be in the interests of shareholders, it also has to take into consideration Hong Kong and the future.