Mergers keep NZ, Aussie exchange union hopes alive

ASX leaves options open after $12.5b move to marry Sydney futures bourse

Five years ago, the proposed merger between the Australian and New Zealand stock exchanges collapsed in acrimony and recrimination, but the world of global equities trading has since changed significantly. So has it changed enough for a trans-Tasman merger to be back on the agenda?

Only this week, the Australian Stock Exchange (ASX) announced plans to merge with the Sydney Futures Exchange (SFE) to create the world's ninth-largest global trading entity.

The plan values the futures exchange at A$2.29 billion ($12.51 billion) and the combined company at A$5.3 billion, with the capitalisation of all stocks listed on the exchange at more than A$1 trillion.

Somewhere in all that value to be created by such a merger is the New Zealand Futures and Options Exchange, which was subsumed by the acquisitive SFE early this decade.

Meanwhile, consolidation among other international exchanges is proceeding apace. Nasdaq has attempted to blow all its competitors out of the water with a #2.4 billion ($32.36 billion) offer for the London Stock Exchange (LSE), which has become a popular takeover target.

This decade has also seen the rise of Euronext, which now combines exchanges in Paris, Amsterdam, Brussels and Lisbon and is talking about a merger with its major rival, Deutsche Boerse in Frankfurt. Nasdaq's bid for the LSE can only accelerate the urgency of those talks.

While all this has been happening, Sweden's OMX - the first bourse to demutualise and list on its own exchange - now controls a number of regional exchanges from Denmark to Helsinki, and Latvia to Estonia.

So, if Paris and Frankfurt can potentially get together, why can Wellington and Sydney not?

For the ASX, the main competitors are the big Asian exchanges in Hong Kong and Singapore, and the rhetoric that regularly comes out of its headquarters in Sydney is that the New Zealand exchange needs a merger much more than the ASX does. After all, the present value of the NZX is just NZ$105 million ($491.84 million) and the value of all the New Zealand-listed stocks is NZ$82 billion.

The Australian view is that significant New Zealand companies such as Lion Nathan will always want to list in Australia to gain access to the deeper and more liquid capital markets on that side of the Tasman.

The view from Wellington is that the country's equity trading would simply be swamped by any merger, with local investors focusing on Australian stocks to the detriment of those from New Zealand. Rather than a merger, it would be a takeover.

While the Australian view might be characterised as chauvinistic, the New Zealand perspective is seen by some as insular and anti-global in an increasingly globalised world.

Asked about cross-border mergers this week, ASX managing director and chief executive Tony D'Aloisio said he wanted a seat at the table if global mergers became commonplace.

'It [the SFE merger] does keep your options open,' he said. 'If the merger of exchanges cross-border does occur, then you are better positioned to do it.'

The ASX, however, has a history of being cagey in its public pronouncements. Only a month ago, the bourse said it saw no value in a merger with the SFE, and Mr D'Aloisio said the SFE 'has not been on my radar'.

For the NZX to come back on to the Australian exchange's radar would require both parties to bury the hatchet over the failed talks in 2001.

NZX chief executive Mark Weldon is largely remembered in Australia for his comments in his firm's 2002 annual report, where he said the merger would have been a 'terribly bad outcome', spelling the NZX's extinction.

'The New Zealand capital markets would have been regulated and constructed from Australia, with little or no regard to the idiosyncrasies of the New Zealand economy and with little impetus to design custom solutions for this market,' Mr Weldon wrote then.

Asked this week about his present view, he was noncommittal and talked not about mergers but about consolidating infrastructure.

'What [the ASX-SFE proposal] shows is that even a large jurisdiction like Australia sees benefits in having one consolidated capital markets infrastructure, and this hasn't come as a surprise to us because consolidation is a global trend and this type of business is driven by scale,' he said.

'For New Zealand, this provides a clear rationale for bringing together the currently fragmented market infrastructure to ensure our settings are right and provide value to our participants.'

He said competition would be driven by efficiency in clearing and settlement and he expected the combined ASX-SFE would ultimately 'be required to make aspects of their infrastructure available to potential entrants'.

It was a rather opaque response that posed more questions than it answered.

Mr Weldon confirmed he was talking about competitors using ASX infrastructure - but would that mean an outsourced arrangement with the NZX using ASX technology yet remaining independent?

What is clear, however, is that global market consolidation is a major force. If the NZX chooses to ignore it, there will be consequences for local equities and the New Zealand economy.

Australia, for its part, has its eye on Hong Kong and Singapore. Merging with the kiwis would be nice, but it is not essential for the aussies.