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Taking stock of the ASX-SGX deal

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COMMENTS

22 November 2010 11:54

The public debate on the proposed take-over of the Australian Stock Exchange (ASX) by the Singapore Exchange (SGX) seems to be dying down. But there are some important issues not yet covered. Here are just a few:

Capitalisation of ASX-listed companies is over twice as large as SGX’s firms

It might seem curious that the ASX, as the larger firm serving a larger market, should be valued by the market at a significantly lower capitalisation than the SGX. This odd situation has given the SGX the upper hand in bidding; it can use its higher price/earnings multiple to offer ASX shareholders a better deal than their own Australian market offers.

In part, this reflects the general premium that Asian markets enjoy, but part of the premium reflects the sharper winds of competition in Australia. Is Australia 'selling itself short' by imposing various pro-competitive requirements on the ASX which might benefit current users of the exchange but which make the ASX less profitable than the monopolistic environment which the SGX enjoys in Singapore'

Singapore's financial centre seems to be establishing itself as the Switzerland of Asia

Switzerland has done well over the past century out of being bankers to the world's tax evaders and others who prefer to operate with Switzerland's 'don't ask/don't tell' assurances of secrecy. If we see this merger as a way of getting a toe-hold into a wider world of international finance, does this environment suit our style of business ethics'

Singapore's so-called 'bridge into Asia'

The Singaporeans certainly know Asia much better than we do. But their sharp-edged business focus and rigorously self-interested international dealings has made them unpopular in Indonesia, Malaysia and Thailand. And they have not made much progress in building bridges to China either, having been outclassed by Hong Kong.

The 'Adelaide syndrome': the overseas shift of the best jobs

Taking over the ASX is not like taking over Optus, where the operations (and jobs) remain in Australia. This proposed merger will be much more like the 'merger' of the Sydney and Melbourne Stock Exchanges, in which the Melbourne operation ceased to exist because all its functions could be performed in Sydney.

Singapore's reputation in this regard is well established. In the 1990s, when international finance companies sought to consolidate their back offices and computer facilities in this time zone, Singapore insisted that financial firms operating in Singapore should have their computers physically located there. Other countries in the region (such as Australia, with its philosophy of letting market forces decide these issues) watched as these facilities, with their well-paid workers doing interesting jobs, shifted to Singapore.

Sure, the Australian labour market is currently at full stretch: but we might have a national view about what sort of jobs we want our children to do. Will our comparative advantage as resource-based 'hewers of wood and drawers of water' mean that we'll drive the big dump trucks, while the white-collar work ('indoor work with no heavy lifting') shifts to Singapore' Lee Kwan Yew's quip about the 'white trash of Asia' may prove prophetic.

One lesson we need to learn in making deals in Asia is that we need to be as tough and single-minded as our Asian business partners are. This is not our natural behaviour, so we are ill equipped for this kind of deal-making. In Singapore, decisions like this are not left up to a few executives and shareholders for whom this is just a straight commercial transaction, maximising the bottom line. It might be worth asking ourselves whether Singapore would be prepared to see the SGX taken over in this way, were the positions reversed.

That still leaves open the question of what would be in Australia's national interest. International trends suggest that a stand-alone ASX is not the way of the future. Cooperative arrangements, consolidation and merger with another exchange seem inevitable. Is Singapore the right partner' If it is, have we got the best terms of the deal' This, rather than a simple yes/no answer, should be the issue facing the Government.

Photo by Flickr user artemuestra, used under a Creative Commns license.

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