Markets look to merge down under

Australian Stock Exchange and New Zealand Stock Exchange begin investigating the possibility of merging operations, with a direct buy out by the ASX the most likely outcome.

The Australian Stock Exchange (ASX) and New Zealand Stock Exchange (NZSE) today announced that representatives of the two exchanges have begun meeting to investigate the possibility of a merger. According to a statement it was decided last week "that merging the two stock exchanges and their markets had sufficient merit to warrant more detailed investigation," and that this would take place over the next few months.

Richard Harrison, an analyst at Australian Equities Research, says that the form of any so-called merger would likely be an acquisition of the NZSE by the ASX. "Given the fact that the ASX is 17 times the size of the NZSE in terms of both market cap and turnover, that would seem to be the only reasonable way of conducting it."

John Hayes, chief financial officer of the ASX, agrees, but stresses that "it's very early days." If the investigations proceed further it will be ASX's second recent attempt at a merger after their proposal to buy the Sydney Futures Exchange (SFE) was knocked back last year by the Australian Competition and Consumer Commission on concerns that the merger would substantially lessen competition. Hayes says he doesn't expect any similar objections to this deal. "I don't think they'll have any problem with us buying a foreign company," he says.

Government support

The NZSE is still a mutual organization of stockbrokers, so any acqusition or merger deal would depend on the members agreeing to demutualise, as well as on the price offered by the ASX. There are also political and regulatory issues to be dealt with, but according to Hayes the deal has the explicit support of the New Zealand government. The chief financial officer says that New Zealand Finance Minister Michael Cullen was at a luncheon in Sydney last month, and upon hearing rumours about possible merger plans said that if it were true, the New Zealand government would do all they can to support it.

Because of the differences in companies law between the two countries, the New Zealand government would have to make some regulatory changes in the event of the two boards becoming one. According to Harrison, this could be a benefit to New Zealand investors. "The legal regime in New Zealand in some respects is fairly lax, most notably in the area of takeovers where New Zealand shareholders can be treated quite shoddily under existing law," he says. "Perhaps if there were a merger of the exchanges they might have to tighten up their local companies law to make it more compatible with Australian law. That would be a separate issue, but you'd think if there were a combined exchange there would be a move towards harmonization of the countries' regulatory regimes."

Across the Tasman

If the deal goes ahead, both of New Zealand's major financial markets will have crossed the Tasman Sea to the big island. In 1992 the SFE acquired its New Zealand counterpart and the New Zealand Futures and Options Exchange is now run as a wholly owned subsidiary of the Australian exchange.

The SFE is the largest financial futures exchange in the Asia Pacific region with annual turnover approaching 30 million contracts. It voted last month to demutualise and many market analysts haven't ruled out the possibility that  a merger between the SFE and ASX might take place sometime in the future.

Since the SFE setback the ASX has been busy expanding in other areas, most notably signing an agreement with Singapore that will allow reciprocal trading rights with respect to the two countries' equities. That agreement comes into effect in July 2001. The ASX also has some rather less concrete deals going with Nasdaq and the Global Equities Market alliance that, at this stage, amount only to a statement of common ideals.

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