Toronto and London Stock Exchanges to merge?

[brockm]

You state that the TSX lead in mining is "because we're the world's richest country in natural resources." That explains the origins of the specialization, but it doesn't explain why Toronto is the go to exchange for resource firms from around the world. We have that position because our large local holdings have created a great deal of expertise in this area. It is not the geographic advantage, but the expertise that today gives the TSX its edge.

This expertise is exactly what the LSE is after, and it is very transportable. It is not just possible but probable that ten years after this deal, most of this expertise will have been transferred to the London offices. With it will go a lot of good paying jobs, and much of our competitive edge in the mining industry. The edge that has helped make so many Canadian mining companies global players.

Even if this were true, and the point is not conceded, it neglects the entire other basis of my argument. The specialization of mining finance is not the whole of Canadian economy, and the upside benefits to almost every other sector in terms of the ability to raise capital would make any loss of "mining finance specialization" to Fleet Street a proverbial drop in the bucket.

I'm sorry. This is another example of Bastiat's What is Seen and What is Not Seen -- also known as the Parable of the Broken Window.

All you are doing is focusing on one thing, to the exclusion of everything else. When you do that in economics, you wreak havoc. Our economy is a diversified service economy. The vast majority of Canadians do not work in the mining sector. At best, they have investments in that sector. And, if as a result, capital investment in the sector improves, the vast majority of Canadian will benefit, even if your worst case scenario comes true.

So, you can colour me unimpressed with your fear-mongering.

 

[SimonP]

There is a reason everyone has focused on mining, because it is those specific areas of expertise where this deal will have an effect.

The benefits in terms of capital raising are minute. There is already a common market for international stocks. As you mention you have no problem buying stocks in Brazil. The exchanges themselves already have a strong self interest in making it as easy as possible for anyone from around the world to buy in, and they have done just about everything they can to make this possible. The barriers between international stock purchases are almost entirely regulatory, and the regulations don't change just because of a merger.

 

[brockm]

First of all, I don't agree with your insane theory that this deal will cause all our mining finance specialization to move to London. Why? What does the TMX's ownership structure have to do with that? It has nothing to do with it. The TMX Group does not employ mining financiers.

Your prediction makes no sense. It smacks of an inferiority complex. You suggest that if our government doesn't protect us from the men with twirly mustaches on Fleet Street and Wall Street, our financial sector will be sucked dry, all our jobs moved to London and Toronto left with nothing.

What articulable reason, pray tell, would there be for mining financiers to relocate away from where the actual industry is -- which is Canada?

 

[brockm]

I will come back to your point about the benefits of raising capital being "minute" as well. You're wrong, you're wrong and you're wrong.

While it's generally easy for investors for invest in stocks wherever, exchanges themselves represent pool capital in the form of index funds. These funds have halo effects and cheapen access to capital.

The benefit of the TSX-LSE becoming the world's second biggest stock exchange would not be "minute" in this regard. But you go on thinking that. Moose, beavers, and long live the maple leaf.

 

[SimonP]

What is the reason that the TSX has so many big resource companies like First Quantum, Orsu Metals, Americas Petrogas that have no operations in Canada? If you're looking to start a company like this you come to Toronto because you know this is where the people who invest in these areas congregate. If you're an investor you come here because you know this is where people with good opportunities come to look for investors. It's a reinforcing network that has taken many decades to build up. Many of these entrepreneurs, and most of the investors are not themselves Canadian. Toronto has just become an agreed meeting place for these transactions, and a big support structure of analysts, bankers, and lawyers, have developed around this.

Now if this merger happens all these investors and entrepreneurs will have a choice between their usual trip to Toronto, or travelling to London. If you were a Peruvian with an expense account which would you pick? Right now most of the big firms are dual listed on both exchanges. If you have the option of just doing Toronto or just doing London, in many cases London will again win out. The banks and law firms in London will also see this opportunity, and will start draining expertise from Canada. Make your average young and ambitious Bay streeter an attractive offer and a lot of them would not think long before agreeing to move to London. Canadian firms would have a much harder time luring workers from the City to here.

Is this guaranteed to happen? No, but it is one of the main motivations for this merger. The LSE is unhappy to have been out competed by a colonial upstart, and through this merger are trying to buy back the lost business rather than earn it.

If we are going to merge markets, it would make more sense to do it with an exchange that isn't greedily eyeing the TSX's biggest plum. If what we want is more access to capital, which is indeed a good thing, a merger with the NYSE/Euronext/DB would make much more sense. Or maybe we should go for a merger with the NASDAQ. Canada could be better at funding internet and technology firms, and access to the NASDAQs expertise could be a big boost.

 

[SimonP]

As to index funds, you're argument only works if Canadian index funds have been consistently under valued compared to their global peers. I'm far from a believer in efficient markets, but even I don't think the world trading community would have missed that one. Differences that do exist between exchanges have vastly more to do with regulation and tax regimes.

 

[brockm]

What is the reason that the TSX has so many big resource companies like First Quantum, Orsu Metals, Americas Petrogas that have no operations in Canada? If you're looking to start a company like this you come to Toronto because you know this is where the people who invest in these areas congregate. If you're an investor you come here because you know this is where people with good opportunities come to look for investors. It's a reinforcing network that has taken many decades to build up. Many of these entrepreneurs, and most of the investors are not themselves Canadian. Toronto has just become an agreed meeting place for these transactions, and a big support structure of analysts, bankers, and lawyers, have developed around this.

Now if this merger happens all these investors and entrepreneurs will have a choice between their usual trip to Toronto, or travelling to London. If you were a Peruvian with an expense account which would you pick? Right now most of the big firms are dual listed on both exchanges. If you have the option of just doing Toronto or just doing London, in many cases London will again win out. The banks and law firms in London will also see this opportunity, and will start draining expertise from Canada. Make your average young and ambitious Bay streeter an attractive offer and a lot of them would not think long before agreeing to move to London. Canadian firms would have a much harder time luring workers from the City to here.

Is this guaranteed to happen? No, but it is one of the main motivations for this merger. The LSE is unhappy to have been out competed by a colonial upstart, and through this merger are trying to buy back the lost business rather than earn it.

If we are going to merge markets, it would make more sense to do it with an exchange that isn't greedily eyeing the TSX's biggest plum. If what we want is more access to capital, which is indeed a good thing, a merger with the NYSE/Euronext/DB would make much more sense. Or maybe we should go for a merger with the NASDAQ. Canada could be better at funding internet and technology firms, and access to the NASDAQs expertise could be a big boost.

Your argument is speculation built atop of more speculation. It is just as equally likely that Toronto-based firms will expand aggressively and pull in London-based talent. The LSE-TSX merger has absolutely nothing to do with Fleet Street wanting to steal Toronto's mining finance industry.

This reeks of some of those insane conspiracy theorization I've ever heard. I'm sure all the major mining financiers took Xavier out to dinner somewhere in The City, and were like: "Okay, Xavier, we're in this together. We need to conspire to buy up and hollow out Toronto's mining finance industry."

I have a much better theory based on rational reasons. For once, the fact that the LSE already <em>uses</em> the TMX's electronic trading platform -- which it bought and pays a license to TMX to use. And the fact that the LSE was late to the game in derivatives trading, and the TSX would give them an in on that market.

The fact that the TSX and LSE are the world's two largest mining stock exchanges is providence.

I can't stand this economic nationalism. I need to take a break before I blow a gasket or something.

 

[Riverdale Rink Rat]

I can't stand this economic nationalism. I need to take a break before I blow a gasket or something.

Hmmm... I'm going to have to page back and find brockm's original argument about why this is a good thing (and I speak as a shareholder and financial services worker.) I see zero benefit to this merger from the TMX/Canada side. Cost cutting? An exchange is mostly a server farm. How do you cut that cost? Synergies? As brockm points out, TMX already sells its expertise to the LSE -- why lose our best customer by merging with them? Higher liquidity? Given the number of new listings X has been doing, why would they need the LSE?

If X was acquiring Pure or Alpha, or merging with the NYSE to create a NorAm powerhouse, I might be persuaded. But this doesn't have any benefits for Toronto or X other than a nice payout for the senior execs. It reminds me of the bank merger mania -- "If we don't get bigger, we'll be left behind!" Well... what's so bad about that? Concentrate on your core expertise (commodity listings/trading platform programming) and grow organically. I'll buy more shares if that happens. Right now, I'm a seller.

As for the 'ancillary benefits to Toronto' argument... I'm neutral on this one. I can see some expertise leaving town to live in London, but not so much as to blow up Bay Street. OTOH, I'll bet a prospector from Timmins is going to get in Duncan's ear and say, well, next time I need cash I'm not going to be able to go see Joe at the Royal York, so maybe I won't even stake a claim. And I'll bet, leading up to an election where the Libs are going to need every vote they can get in Northern Ontario to offset their losses in 905, this merger gets quashed.

 

[Riverdale Rink Rat]

Here is my response, in article form, at The Volunteer: http://www.thevolunteer.ca/2011/02/we-dont-want-your-investment/

Seriously? THAT'S YOUR ARGUMENT??? Hahahahahahaha.... That's awesome! At no point do you actually make an argument for or against the merger. You just say 'we should not be nationalistic about this, 'cause that's bad!' Give me 3 GOOD, ECONOMIC reasons why I should sell my X. So far, you got nuttin'.

 

[Bogtrotter]

Bloomberg- LSE-TMX Deal Unlikely to Win Canada Approval, Instinet Says

The proposed combination of TMX Group Inc. and London Stock Exchange Group Plc won’t get approval from Canadian regulators, according to Instinet Inc.’s research unit.

Regulators will probably say that Canada’s importance in the merged company will wane with further consolidation in the industry, Alison Crosthwait, Toronto-based director of global trading strategy at Instinet said today in a report.

“We do not believe that the proposed merger, as currently constituted, will make it through the Canadian regulatory process,†Crosthwait said. “As the market is currently giving the deal only a 60 percent chance of being consummated, we are not the only party questioning its feasibility.â€

Instinet owns Chi-X Canada Inc., a competitor to TMX. Nomura Holdings Inc. in Tokyo owns Instinet.

The federal government, which may face an election this year, isn’t likely to feel comfortable ceding control of the Canadian exchange, she said, adding that public sentiment won’t be in favor of the deal unless it increases investment in Canada. Still, a combined LSE-TMX will likely promote Canadian companies to European investors and introduce some new financial products, she said.

The LSE agreed Feb. 9 to buy TMX in a C$3.2 billion ($3.22 billion) stock deal. LSE investors will own 55 percent of the combined company, while TMX shareholders will hold the rest.

The transaction requires approval from Canada’s federal government and five provincial regulators including Ontario and Quebec, as well as the U.S. Securities and Exchange Commission.

The Ontario Securities Commission plans to hold a public hearing as part of its review of the transaction, Chairman Howard Wetston said today in Toronto.
Public Hearings

Ontario’s government yesterday agreed to set up a committee to review the transaction, and will hold a series of public hearings starting March 2. The committee is expected to submit its findings by April 7.

The Canadian government will review the deal under the Investment Canada Act to determine if it has a “net benefit†to the country’s economy. LSE’s bid comes less than four months after Industry Minister Tony Clement rejected a hostile takeover of Potash Corp. of Saskatchewan Inc. by BHP Billiton Ltd.

 

[gristle]

Your argument is speculation built atop of more speculation.

So is yours - unless you have some sort of fully functioning crystal ball.

 

[brockm]

Seriously? THAT'S YOUR ARGUMENT??? Hahahahahahaha.... That's awesome! At no point do you actually make an argument for or against the merger. You just say 'we should not be nationalistic about this, 'cause that's bad!' Give me 3 GOOD, ECONOMIC reasons why I should sell my X. So far, you got nuttin'.

Nuttin'? I'm sorry, but you're not selling YOUR X. The shareholders (read: owners) of the TSX, the TMX Group are the ones who need to come up with reasons whether or not they should sell their X.

That's the point of my argument not isn't it. Canadians are acting like it's their X, when it's not their X. It's a privately owned X. But you, I suppose, are saying that when someone's X becomes big enough, or economically important enough, it's ownership should be watered down by conversion to become a de facto public asset. I don't believe this. I happen to believe in property rights, and the rights of shareholders. Not the rights of the farm animals to demand "their say" over the disposition of assets they do not own.

I do not believe a private company should have to prove to anyone, other than their shareholders, that the sale of the company is in the benefit of anyone other than the shareholders. It should not have to prove that the sale benefits the general public.

Well, anyways, I'll be at press conference today at Queens Park to launch the effort to add constitutional protection for property rights in Charter. A bit of coincidence, that.

 

[brockm]

If X was acquiring Pure or Alpha, or merging with the NYSE to create a NorAm powerhouse, I might be persuaded. But this doesn't have any benefits for Toronto or X other than a nice payout for the senior execs. It reminds me of the bank merger mania -- "If we don't get bigger, we'll be left behind!" Well... what's so bad about that? Concentrate on your core expertise (commodity listings/trading platform programming) and grow organically. I'll buy more shares if that happens. Right now, I'm a seller.

As for the 'ancillary benefits to Toronto' argument... I'm neutral on this one. I can see some expertise leaving town to live in London, but not so much as to blow up Bay Street. OTOH, I'll bet a prospector from Timmins is going to get in Duncan's ear and say, well, next time I need cash I'm not going to be able to go see Joe at the Royal York, so maybe I won't even stake a claim. And I'll bet, leading up to an election where the Libs are going to need every vote they can get in Northern Ontario to offset their losses in 905, this merger gets quashed.

You speak as it's not the shareholder's property to sell. Which is quite shocking. You should keep that in mind whenever you buy stock in a company. That, we don't place any real meaning on the term "ownership". The "people" can decided something is a "public asset" at will.

The matter-of-factness with which Canadians assert the need for protectionism and economic nationalism is quite stunning, really. The United States and the United Kingdom, today, have very little controls on the sale of their companies to foreign companies. This lassiez faire policy has been good for their economies, the financial crisis aside -- which is unrelated to policies of economic protectionism. There is no good evidence to support that allowing foreign buyouts damages domestic economic interests.

 

[brockm]

So is yours - unless you have some sort of fully functioning crystal ball.

Well, my argument rests on the principles of private ownership. Not the collective right of Canadians to essentially dictate to private owners who they can dispose of their assets to. So, no, it doesn't rest on speculation.

Whereas, the opposing view almost certainly does. It states, and correct me if I'm wrong: "If we feel that this transaction is not in the interests of Canadians (or Torontonians), the government should use it's legal powers to override the legal owners (the shareholders) of the TMX Group and disallow the sale.". Which is to me, the same as saying that the public considers the TSX a de facto expropriated public asset. Because it seems to me, that the concept of ownership confers with it the right to dispose of the underlying asset on mutual terms with another party.

Considering that nobody in this forum seems to believe the TMX Group has any such right, I must conclude that nobody here actually believes the TMX Group owns the TSX. At best, you believe the TMX Group are glorified custodians. But you most certainly do not acknowledge their ownership. Because if you did, you'd not be suggesting they have no right to sell their own assets.

 

[Redroom Studios]

^^^wow, how much longer till his brain explodes? maybe we'll see it as part of the Queens' Park press conference highlights....