Wednesday, February 16, 2011

Stock exchange mergers: A study of capitalism vs. nationalism

I have always regarded stock exchanges as bastions of capitalism. In the wake of the proposed mergers of Deutsche Boerse and NYSE-Euronext and the LSE and the TMX, it was interesting to see the reaction in some quarters.

As for the former transaction, concerns have been raised because Deutsche Boerse shareholders will control 60% of the new entity. Moreover, 10 of the 17 board seats will be held by Deutsche Boerse directors and the remainder by NYSE-Euronext directors. Never mind that the point of the transaction is to merge trading platforms, with a focus on derivative markets - which to me makes lots of sense.

I happened to discuss the LSE/TMX merger with a number of investment professionals last week and my opinion was also positive. Viewed in a global context, the Canadian market is tiny and would benefit from a focus on comparative advantage and Michael Porter's ideas about industry clustering, specifically the financing of resource extraction companies. Canadians know mining and energy companies and have been financing them for generations. I have been acquainted with investment bankers whose advice to resource companies to list in Canada, regardless of where the resource or reserves are, because small and mid-cap Canadian listed resource extraction companies tend to trade a higher multiples than similar companies listed elsewhere. A TMX tie-up with the LSE would expand the horizon for Canada as the place to go to for resource financings.

Alas, it seems that nationalism has gotten into the act, just like the case of the Deutsche Borerse/NYSE-Euronext merger. At the federal level, Industry Minister Tony Clement made noises that he will review the proposed transaction to ensure that it is of "net benefit" to Canada. That's because much of the regulatory authority exists at the provincial level, where the merger can be blocked, and Ontario Finance Minister Dwight Duncan has already called the stock exchange a "strategic asset" and objected to the fact that the largest shareholder of the merged entity would be Dubai, with a 11.3% interest.

I had to laugh when the lawyers piled on. They argued that a merger could lead to job losses when it is likely to lead to job gains:
Some Bay Street lawyers are echoing concerns voiced by the Ontario government over the proposed merger between the Toronto and London stock exchanges, saying it could lead to the loss of high-paying jobs in Canada’s financial capital.

Lawyers involved in helping companies list their shares for trading are concerned about potential job losses in Toronto, a major financial hub that employs more than 300,000.
It is sad that even in the bastions of capitalism, high minded ideals about free markets have given away to nationalism and protectionist sentiments.

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