Scaremongering the real winner in ASX takeover

by Michael West | Oct 30, 2010 | Business

AFTER years in the strategic wilderness – blissfully presiding over its monopoly during the biggest bull market in history – the ASX finally got all proactive this week and unveiled a strategy: surrender Australia’s stock exchange into the hands of an Asian dictatorship.

The deal looks less than an even chance of getting up, such is the political opposition. And aspiring to branch-office status of the Singapore Stock Exchange has hardly won ASX directors any plaudits. They have performed their fiduciary duty though, bringing home an $8 billion takeover bid. And this, despite the strident arguments on both sides, is the most compelling thing about the deal. The price is good.

But before it passes regulatory muster, there will be much scaremongering. Proponents of the deal will cry synergies, liquidity, the fifth-biggest exchange in the world, “Asian hub” and a boon for the export of Australian financial services. Killing the deal, they will contend, would heighten perceptions of this country’s regulatory risk.

Its detractors will counter by crying “selling the farm”, Singapore human rights, tax leakage, job losses, control over sensitive information, national security and falling compliance standards.

So far, the ASX has failed to put its case, perhaps because the highlight of the deal is that it is shareholder accretive. But the value proposition of a combined SGX/ASX is simply not borne out by the history of exchange mergers. The New York Stock Exchange’s takeover of Euronext in 2006, hailed as a $US20 billion visionary mega-merger, is now valued at $US8 billion.

A year later, Nasdaq took over OMX (Sweden and Finland). Nasdaq shares have since fallen 60 per cent. Old-timers will recall the Melbourne Stock Exchange being wrapped into the ASX Sydney HQ in the 1980s and rue the subsequent decline in the city’s corporate prestige.

Just as there is no overwhelming reason to approve this deal – apart from ASX shareholder interests and being seen to operate open markets – there seems no great reason to knock it back, either. And since the government has been so ardent lately in its support for competition (allowing another exchange operator, Chi-X, to enter the country and take on the ASX) it would be inconsistent to deny SGX the same opportunity.

THIS brings us to everybody’s favourite subject, compliance. The ASX is more than just a money-spinning monopoly. It also has a regulatory role. It oversees the compliance of its listed companies, even itself. Regulating oneself is the quintessential conflict of interest but regulating everybody else can be just as tricky because regulation costs money, ergo, the less regulation the better the bottom line.

ASX likes to label its role as “supervisory” rather than regulatory. All care, no responsibility, say its critics. Its role is to detect the likes of insider trading and market manipulation and refer them to the Australian Securities and Investments Commission.

Not much happens on this front. Just look at the paucity of insider trading prosecutions vis-a-vis the run-up in share prices before almost every price-sensitive deal (yes, even including this week’s SGX bid for ASX). Still, the big governance question for regulators now is: how will the ASX compliance role be executed once in Singapore’s control? Might it even improve?

ASX allows itself a rather glowing report card. In its latest publication, ASX displayed 93 per cent compliance with reporting requirements on all 27 recommendations of the ASX Corporate Governance Principles and Recommendations. The rub, however, is that the ASX is reporting what its listed entities “say they do” not “what they do”.

A case in point is that the exchange monitors company directors trading in their own shares. In the first quarter of 2010, a staggering 41.1 per cent of all directors’ trades were made during “blackout” periods. This was up 20 per cent on previous periods (and tends to undermine the notion that the sharemarket is just a casino). The blackout period is the time between a company ruling off its books and publicly announcing a result: a time every investor, availed of the best information, would choose to trade.

YOU have to hand it to Macquarie. With no satellite trusts left to pillage and a dearth of large financial transactions during the September half-year, it can still suckerpunch the market.

It hosed down its outlook, so plenty were tipping a profit downgrade. Instead it was $40 million ahead of guidance. Still travelling on a PE multiple higher than Goldman Sachs, the real test for it will come in two years when the Macbankers have to begin rolling the $20 billion in three- and five-year notes they borrowed last year on the taxpayer teat.

They simply on-lent these sovereign-guaranteed funds and pocketed the difference between the low-cost triple-A rating and the higher rates they charged their corporate clients. Nice work; it has kept the bank in the black.

Assets under management: $317 billion. Debt under management: not available.

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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