project avatarasx asx sgx failed merger

7/28/2019 Project AvatarASX ASX SGX Failed Merger

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Project Avatar: ASX-SGXFailed Merger

BMA 5318 Investment BankingAmeya Patkar, Janhavi Anand, Kang Suk Choe, Prabodh Shahi, Zaheed

Tejani


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Contents

Industry Background ................................................................................................................................ 1About ASX............................................................................................................................................... 1About SGX............................................................................................................................................... 2How the ASX-SGX Merger Story Began ................................................................................................ 2Motivations behind Merger...................................................................................................................... 3Deal Structure .......................................................................................................................................... 5Approvals Required for Merger ............................................................................................................... 6Funding of the Deal ................................................................................................................................. 7Immediate effects on Stock price of ASX and SGX................................................................................ 7Issues concerning the Merger .................................................................................................................. 8Efforts to push Merger Through .............................................................................................................. 9Team Opinion: What SGX should have done........................................................................................ 10Blocking and the Reasoning behind it ................................................................................................... 11Effects of Blocking the Deal .................................................................................................................. 12Team Opinion: Why the Deal Failed ..................................................................................................... 13Conclusion ............................................................................................................................................. 14Appendix ................................................................................................................................................ 15Bibliography .......................................................................................................................................... 19


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Project Avatar: ASX-SGX Failed Merger

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Industry Background

Due to the advancement and integration of financial markets in 2010, the stock market industry had

become highly competitive. Global stock exchanges were working more like individual companies

with different customers, including firms, financial intermediaries and private and institutional

investors. One of the largest drivers of this competition was technology which increased the speed

of trading transactions, while also making them more accessible across the globe. Globalization

also played another key role in competition, as mergers and acquisitions and cross-border holdings

of financial assets increased. At the time ASX defined its main objective as being able to maintain

power in the Australasia market listings, while increasing listings in Southeast Asia. SGX tried to

position itself in the market by attracting Asian companies, especially private firms found in China,

that were not globally recognized then.

About ASX

ASX was a multi-asset class, vertically integrated exchange. Measured by market capitalization it

was amongst the top-10 listed exchanges in the world. Its activities included primary and secondary

market services, central counterparty risk transfer, and securities settlement for both, equities and

fixed income products. It functioned as a market operator, clearing house and payments system

facilitator. It also monitored and enforced compliance with its operating rules, promoted standards

of corporate governance among Australias listed companies and helped in educating retail

investors.


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At the time, ASXs diverse domestic and international customer base included issuers of securities

and financial products, fund managers, hedge funds, commodity trading advisers, investment and

trading banks, market data vendors, brokers and proprietary traders and retail investors.

By providing its systems, processes and services reliably and fairly, ASX generated confidence in

the markets. This feature was integral to the long-term commercial success of ASX.

About SGX

SGX was Asias second largest, and among the worlds largest listed stock exchange. Being the

Asian gateway, SGX was the market of choice for investors wanting to participate in Asias vibrant

and rapidly-growing economies, as well as for Asian issuers seeking international capital.

SGX offered an extensive suite of securities, derivatives and commodities products, making it

Asias most international exchange. SGX's services include listings, trading, high-speed market

access, clearing and settlement to depository services and central counter party services for OTC

traded derivatives.

By providing long trading hours in the region, and using cutting-edge technology, SGX was an

important conduit for investment flows into and out of Asia.

How the ASX-SGX Merger Story Began

The ASX and SGX chiefs aimed to create Asia's fourth-largest stock exchange through an $8

billion cash and shares merger of the two exchanges. This new entity would benefit through various


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synergies, thus enabling the merged entity to tackle existing and emerging competitors. They code-

named the deal Avatar, chosen after the futuristic Hollywood movie about humans invading a

new planet for its precious resources.

It was decided that both exchanges would operate out of Australia as well as Singapore, and ASX

would maintain its Sydney headquarters and a local management team. However, the core question

about the merger to the Treasurer was if Australias economic prosperity was being adversely

affected by the formation of ASX-SGX.

Motivations behind Merger

The merged entity would become the fifth largest securities exchange in the world by market

capitalization (Exhibit 1), the second largest listings venue in Asia, and the largest provider of

exchange-traded funds, derivative products and real estate investment trusts (REITs) in Asia

(Exhibit 2).

The management of both, SGX and AGX were interested in going ahead with the merger. The main

reasons as provided by them were-

1. Mitigate threat from the entry of the dark pools of liquidity

Competition was anticipated to increase in the near future when Chi-X (dark pool) began trading.

Chi-X had the potential to take away up to 60% of the total trading done on the SGX at that time

(Exhibit 3 and 4).


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2. Mitigate threat from the rise of China

With the rise of China, an increasing number of companies wanted to list in Shanghai rather than in

Australia, Singapore, or Hong Kong. A strengthening Chinese market could reduce the ASEAN

exchanges to small players, surviving only on a limited supply of local capital. It was then

anticipated that China would take away 30% of international investment capital that would

otherwise come to the SGX (Exhibit 3 and 4).

3. Promotion of Australia as a regional financial hub

Although having an overly domestic focus in its financial sector, Australia had many attractive

qualities as a market for financial services such as a skilled and mobile workforce, political

stability, a sound legal and regulatory framework, worlds largest pools of funds under

management, strong banking system and world-class exchange infrastructure. However these were

not translated into significant cross-border activity. Australias ambitions to become a regional

financial services hub required stronger international connections, especially into Asia.

4. Increase access to foreign capital and reduced cost of capital

ASX-SGX had the potential to increase access to foreign capital, and lower the cost of capital

through increased scale, liquidity and diversification. Given the dependence of Australias

economic prosperity on continuing access to foreign capital, any proposal that increased access to

and reduced the cost of foreign capital to Australia would be in its national interest.

5. Opportunities for diversification


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ASX-SGX merger would create opportunities for Australian savers to diversify their asset holdings

more easily across Asian investments, and for Australian issuers to broaden their sources of capital

to include the rapidly growing pool of Asian savings.

6. Numerous complementary features of ASX and SGX businesses (Exhibit 5)

The complementary and synergetic features between ASX and SGX included-

ASX was dominated by financial stocks, especially banks, and mining companies. SGX on the

other hand, was dominated by industrial and materials companies, information and communications

technology (ICT) stocks, real estate investment trusts (REITs) and financial stocks.

Bond trading was far more established on SGX than ASX, with the value of bond trading on SGX

more than 15 times that on ASX in 2009.

ASX had a wider array of derivative products available to market participants compared to SGX.

However, SGX offered a suite of regional index futures contracts covering the Chinese, Japanese

and Indian markets, whereas ASX listed only one domestic stock index futures contract.

Deal Structure

The outcome of the merger was to be a new holding company ASX-SGX Limited, listed on both

the Singaporean and Australian exchanges. This new entity was to continue to operate out of

Australia and Singapore, and have an international board comprising of 15 directors from five

countries, including four from ASX. The CEO of SGX was to be the CEO of the combined group.


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Issues concerning the Merger

The following were the issues concerning the merger-

1. National interest of Australia

23.5% share in the SGX was held by SEL Holdings Pte on behalf of the Financial Sector

Development Fund, which was controlled by the Monetary Authority of Singapore (MAS). This

holding of MAS was a major source of concern for the Australian authorities.

2. Loss of jobs in Australia

It was perceived that through the merger, ASX would become a lesser partner to SGX.

Furthermore, since Singapore was a direct competitor to Australia as a financial services center, it

would lead to loss of financial sector jobs in Australia.

3. Value destruction

Another issue was the value destruction factor that both exchanges faced to some extent. SGX was

perceived to be diluting its growth potential by merging with the slower-growing ASX. Also, it was

thought that SGX would fail to provide ASX with access to large capital flows because SGX was

smaller as compared with ASX.

4. Opposition from Tokyo

Tokyo Stock Exchange, which was then the second largest shareholder in SGX (5% share) was not

comfortable with the merger due to the dilution of its holding as a result.


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5. Opposition from Honk Kong

The merger faced opposition from Hong Kong since it would make it more difficult for Hong Kong

to win offerings by commodity companies and expand further.

6. SGX down gradation

The outlook on the SGX stock was downgraded by OCBC, JPMorgan, and Credit Suisse AG

following the announcement of the merger proposal. The reasons for this were the vulnerability of

its share price to regulatory issues related to the proposal, the higher indebtedness that would result

if the merger was to go through, and that SGX growth would be slower based on ASXs

unappealing growth profile.

Efforts to push Merger Through

The following measures were employed by both parties to try and get the approval for the merger-

Changing the board structure

SGX and ASX announced changes to the initially proposed board structure of the merged entity, in

an attempt to please the Australian regulators. The new board was to have 5 each of Australian and

Singaporean directors. The remaining 3 directors would be international. Under the original

agreement, ASX would have had only had 4 board seats on a 15-member board. Also, ASX and all

of its licensed subsidiaries were to maintain boards with a majority of Australian directors and an

Australian citizen as Chair.


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Clarifications and answering queries

SGX and ASX together exchanged more than 100 queries with the Australias Foreign Investment

Review Board (FIRB) relating to their merger proposal. The FIRB is the regulator that makes

recommendations to the Treasurer about whether a takeover is in Australias national interest.

However, at the end, the FIRB had advised that the takeover was not fit to the national interest and

Swan was of the view that the bid should be rejected.

Lobbying efforts

ASX hired senior lobbyists to pitch its case. David Gazard, who once was an adviser to the former

conservative government's treasurer, and Cameron Milner, who had worked with current Prime

Minister Julia Gillard, led the charge. Well-connected bankers at advisers UBS were also involved.

However, as per many analysts, the lobbying may have started too late.

Team Opinion: What SGX should have done

Different as compared to other mergers such as the Deutsche Boerse and NYSE Euronext or

between London Stock Exchange and Canadas TMX, the SGX-ASX deal was structured more as

an acquisition. SGX should have taken a softer approach, by picturing the operation as a strategic

tie-up rather than a takeover.

Also, the merger seemed to satisfy ASXs board of directors and shareholders, and all concerns

came from the direction of Australian government officials who were worried about the national

interest and the image of Australia. Even though ASX and SGX were quick to point out the

numerous benefits of the merger, they were not able to convince the Australian regulators. To win


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over the only opponents, SGX should have followed some non-market strategies, such as lobbying,

trying to align the company interests with those of the public administration to get the final

approval. Lobbying strategies become crucial when national interests are present.

SGX should have also followed a better communication strategy, because we believe they were

reactive, and not proactive in letting the regulators know how this merger could be beneficial for

Australia. They should have further warranted that commercial jobs would stay in Sydney and not

move to Singapore.

Another alternative to approach the acquisition would have been to start with a minor stake in ASX.

SGX should have attempted to gain control in an incremental manner, so as to be able to get

representation in the Board of Directors. This way would have helped in understanding the possible

reactions against a future takeover.

Blocking and the Reasoning behind it

The Australian government officially blocked the deal on 5 th April 2011.This was mainly based on

the FIRB submitted report to the Australian treasury. The deal was blocked by the Treasurer under

the Foreign Acquisitions and Takeovers Act.

The reasons given for the rejection were, firstly the perception that the deal was not really a merger,

but rather a takeover. This would have resulted in Australias financial sector becoming a

subsidiary to a competitor in Asia. Secondly, Australian regulators believed that since SGX was a


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relatively smaller regional exchange as compared with ASX, the merger would not provide a

gateway to Asian capital flows asper ASXs expectations.

The regulators also mentioned that the takeover would cause many financial sector jobs to move to

Singapore, thus benefited Singapore more than Australia. Finally, ceding regulatory control of ASX

to a foreign party would raise serious risk to the stability of Australias financial system as ASX

clears and settles all trades in the country and plays a key role in guaranteeing the market's integrity

and stability.

Effects of Blocking the Deal

Damage to Australias image

A major backlash caused by the rejection of the merger proposal on loosely defined grounds of

national-interest was that it generated a high level of sovereign uncertainty regarding future M&A

activity involving Australian companies. This also dealt a major blow to ASX's hopes of finding a

partner against a back drop of consolidation amongst exchanges globally.

Uncertainty over future of SGX

The decision threw a spanner in the works for the wave of exchange consolidation sweeping the

globe and left a cloud hanging over the future of the SGX, which needs to find new partners or face

the risk of being swallowed up itself.

Cost to SGX


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Market sentiment regarding the deal can also be estimated looking at the behavior of the SGX share

price at the time. On first announcement of the deal, it fell about 15%, while news of the merger

rejection led to a 6% rise from its pre-announcement value. This could have been because ASX was

a slower growing company (P/E 16) as compared to SGX (P/E 26).

All the factors combined together indicated that the deal would have failed even without the

interference of the Australian treasury and government.

Conclusion

With increasing competition from Chi-X and the estimated loss of 25% in the equity-trading market

share, it was important for ASX to consider a merger or a strategic partner to help increase its

efficiency and reduce operating costs. Also, if the merger would have gone through, the proposed

Chairman of new entity, Magnus Bocker would have been able to better utilise his years of

experience to deal with outside competition.

If ASX were to consider a merger at a future date, its best possible bet would still remain as SGX,

due to a dearth of options available. With a market capitalization of USD 6 billion, ASX was larger

than the Nasdaq/OMX and the LSE. Also, due to their recent merger, Deutsche Boerse and NYSE

Euronext would not be interested in another merger in the near future. The only remaining option

was the Hong Kong Stock Exchange, which will probably present a national-interest threat to

Australia. Thus, weighing the developments and the scenario at the time, a merger or strategic

partnership with SGX seemed to be ASXs best option.


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Exhibit 3

Exhibit 4


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The boxes in blue shows the situation if no change takes place and SGX and ASX remain in status

quo. The size of each box represents the allocation of capital to each area. Light blue shows the

allocation of global capital. As shown, of the total capital, a small amount would be allocated to

each individual exchange, and a larger amount to the dark pools. The China market too would get a

substantial share.

The dark blue area shows the flow of local capital. It shows a small amount to the local exchanges,

a larger share to the dark pools, and slightly larger amount to China. As the local exchanges would

be starved of liquidity, their listed companies would have to chase international capital by listing on

other exchanges. This could potentially accelerate the drift of trading activity to China.

The light green boxes show the expected allocation of local and international capital with the

SGX/ASX merger. The allocation of global capital would be more evenly balanced. There would

still be a leakage to the dark pools and China, but the loss would be much less. The allocation of

domestic capital would also change. The bulk of capital would remain on the local combined

exchange and the dark pool. A smaller amount would be diverted to the China exchanges as there

would be enough liquidity in the local combined SGX/ASX exchange to meet the requirements of

most listed local companies. They would not need to go overseas for capital.


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Exhibit 5

Exhibit 6

5.00

7.00

9.00

11.00

13.00

15.00

25.00

30.00

35.00

40.00

45.00

50.00

2010-07-05 2010-11-05 2011-03-05 2011-07-05 2011-11-05

ASX Offer Price Adj. Offer Price SGX


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Bibliography

(2010). ASX and SGX combine to create the premier international exchange in Asia Pacific - the.

ASX-SGX: why the combination is in Australias national interest. (2011).

How the ASX SGX Merger Failed. (2011).

How the ASX-SGX merger failed. (2011, April 21). Retrieved March 18, 2013, from

www.smh.com.au: http://www.smh.com.au/business/how-the-asxsgx-merger-failed-20110421-

1dqb2.html

SGX and ASX agree to terminate merger after Wayne Swan blocks move . (2011, April 08).

Retrieved 03 18, 2013, from www.theaustralian.com.au:

http://www.theaustralian.com.au/business/markets/sgx-and-asx-agree-to-terminate-merger-after-

wayne-swan-blocks-move/story-e6frg916-1226035892602

Singapore Stock Exchange. (2011, October 13).

(25th October 2010). Wall Street Journal.

(6th April 2011).Reuters.

Guppy, D. (2011). Global Markets and the SGX and ASX.

project avatarasx asx sgx failed merger

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