http://www.thestar.com/columnists/article/998636--olive-a-much-better-fate-for-tmx
If it succeeds, the rival bid for TMX Group Inc., owner of the Toronto Stock Exchange, will make history far beyond derailing a takeover offer for TMX made by London Stock Exchange PLC in February, supported by Royal Bank of Canada and Bank of Montreal.
The nine-member Maple Group Acquisition Corp., a consortium of four Canadian banks and five pension funds, seeks to further strengthen a TMX already regarded by investors worldwide as the “go-to” exchange for trading in resource firms, notably mining companies.
Current conventional wisdom has it that an urge to merge will result in a handful of global mega-exchanges.
Except that four of Canada’s Big Six banks immediately objected to the LSE-TMX combo. Added last year to Forbes’ ranking of the world’s 10 most influential financial centres, Toronto “does not depend on selling out or waiting for others to ‘save’ us,” said the objecting banks in an open letter.
In April, Canberra rejected an $8-billion proposed takeover of Australia’s principal stock exchange by that of Singapore. Citing a likely brain drain, Australian treasurer Wayne Swan nixed a deal he claimed would “risk seeing jobs and capital move to Singapore.”
That same month, the Taiwan Stock Exchange asserted its preference for internal growth, and for alliances to takeovers.
Mega-exchange mania has so far yielded cumbersome, debt-laden bureaucracies that have generated meagre investor returns. Surrendering our capital markets to a fad doesn’t seem an ideal economic strategy. TMX is a nation-building enterprise older than Confederation and poised for greater things than becoming a backwater.
Tom Kloet, the American recruited to run TMX only to try delivering it into foreign hands, claims an LSE deal will create a “globally competitive yet domestically focused capital marketplace.”
Which, as it happens, TMX already is.
TMX accounts for nearly six of ten publicly traded mining firms worldwide. Last year, they raised $17.8 billion in equity capital, about 60 per cent of the world mining total. Close to 200 foreign resource firms have their principal listings on TMX exchanges, though many lack Canadian assets.
By 150-year-old tradition, TMX is in the business of nurturing its staggering 1,531 listed mining firms into global giants like Barrick Gold Corp. and Teck Resources Ltd.
By contrast, mega-exchanges “won’t be as strong an advocate for the smaller companies in each country” as local exchanges have been, David Weild IV, former vice-chairman of Nasdaq OMX Group, world’s second-largest exchange, told the Wall Street Journal in April.
Which is only common sense. The revenue stream in fees from having a humongous Sun Life Financial Inc. listed on your exchange is equal to scores of Red Rocket Resources listings. Why would you cater to those minnows? Especially when you’re an LSE, whose culture is utterly foreign to doing so?
Some 10 per cent of those TMX-listed mining companies are international enterprises, owning more than 5,000 properties outside Canada. For the recent GTA graduate in geology, finance or engineering, Toronto is the gateway to the most challenging mining and energy projects worldwide.
And economic nationalism aside, as many as 20,000 people in the GTA already derive their living directly or indirectly from TMX.
Maple is trumping LSE’s bid by 15 per cent, in a $3.6-billion cash and share deal, compared with LSE’s all-share $3-billion bid. Among dealmakers, a superior bid like Maple’s would be enough said. But it’s how Maple justifies its premium price that makes its proposal in the national interest.
The future of exchanges isn’t mega-trading arenas, but “vertically integrated” ones. That is, holistic exchanges that can boast first-in-class prowess in stock trading, derivatives, and clearing and settlement of trades, taking a fee at every stage.
A deficient LSE covets both TMX’s Montreal-based derivatives and its TMX Venture Exchange. What TMX, like most exchanges, lacks is its own clearing and settlement business. That’s an asset that makes Deutsche Boerse the world’s second-most valuable exchange in market cap.
The Big Six banks and TMX are partners in CDS Inc., Canada’s stock-clearing operation. CDS would be folded into the new TMX by Maple. So would Alpha Group, a rival Big Six-owned exchange that has been draining market share from TMX.
CDS currently charges less for clearing than all but a handful of the world’s clearing systems — about a penny a trade. Deutsche Boerse charges 66 cents. Which explains why DB stock trades at a price-earnings multiple of 23, and TMX just 14.
Clearing systems are elaborate operations, costly to build and maintain. Which accounts for their monopoly status. Clearing and settlement would be a lucrative business for a new TMX if fees were raised. Since a new TMX’s bank part-owners would also be its biggest customers, the fees would be well short of DB’s, but enough to transform CDS into a profit centre. Meanwhile, the TMX market share siphoned off by Alpha over the past few years would come home.
The end game for the Maple architects would likely be to grow a healthier TMX by allying with other resource-oriented bourses itself. Such deals might not be takeovers, but mere alliances that don’t offend local sensitivities in places like Canberra.
There’s an opportunity for a Canadian-owned TMX to create a new type of global exchange. Rather than an amalgam of acquired exchanges bashed together, it would be modelled on the Commonwealth.
Back-office and other costs would be cut by spreading across a larger number of clients of TMX and exchanges in Sydney, Johannesburg, Santiago, Ghana, Lagos, São Paulo and Jakarta. All-important listing requirements and regulation would remain local. And expertise in financing, geology and infrastructure would be shared among half a dozen or more exchanges.
Do we really want all that economic activity so concentrated? Concentration actually is diluted by the pan-Canadian Maple bid, which limits the banks’ ownership to 25 per cent, with 35 per cent held by pension funds in Alberta, Ontario and Quebec. As for competition, Alpha is only the largest of several rival “alternative trading systems” to TMX. And much of the trading in “dual-listed” Canadian stocks happens on the NYSE, to which international investors are more accustomed.
The big banks sounded their objections early to the LSE-TMX idea, sharing Duncan’s worry about the loss of what he rightly calls a “strategic asset.” The Maple proposal turns those concerns on their head. It not only retains local control of a strategic asset, but might just make TMX a global pioneer in cooperative exchange federations.
----
First article Ive really read on the issue...Im not really sure where I stand...but the Maple bid sounds good to me...
