Singapore's ASX Buy May Be Off

A combination of narrow Australian nationalism, reasonable suspicion of Singapore's statist system and revolt by the non-government shareholders in the Singapore Stock Exchange (SGX) may yet kill its US$8.3 billion offer for the Australian Stock Exchange (ASX).

But the offered price reveals much about Singapore's trophy-hunting mentality, and that of the supposed star western executives it loves to hire – in this case Magnus Bocker, recruited in 2009 from Nasdaq-OSX. It is a reminder of earlier zeal to buy big chunks of major western banks and investment such as UBS and Merrill Lynch near the top of the market and then throw extra cash at them when they got into trouble. It is also a reminder of what might have been if former BHP boss and serial acquisitionist Chip Goodyear had not fallen out with the Temasek elite even before he formally took the top job.

Stock market mergers and cross-holdings have been all the rage in recent years and Bocker is certainly familiar with all the bids, successful and otherwise, which the global industry has seen. But less striking than the fights for control of exchanges has been the additions to value-achieved by the various mergers. So skeptics could reasonably suggest that synergy and an enhanced rate of return on SGX capital is the not real reason. Getting bigger for its own sake is an abiding characteristic of many chief executives, particularly when brought in from the outside and hence expected to make a quick splash and do big deals.

In the case of SGX that fits with the Singapore government desire to enhance the state as a trading centre. As in many other cases – tax breaks, subsidies etc – the government is willing to put supposed total returns to the nation well ahead of returns on capital for specific businesses. Decisions like this are driven by Singapore's political/bureaucratic elite not by markets.

Whether owning the ASX would actually bring much broader benefit is unclear. Cross-listings could take some business in Australian stocks such as BHP and Rio Tinto away from London because Singapore's opening hours straddle Sydney and London. But Singapore's main game has to be to attract foreign listings and ADRs to compensate for the small size of its domestic market, which is anyway dominated by state-controlled enterprises such as CapitaLand and Development Bank of Singapore.

Singapore has certainly been far more pro-active than its counterpart in Hong Kong, which for several years has been lazily coasting along, relying on mainland listings to deliver business and a cost structure that makes the exchange – which enjoys a monopoly and over which the government has effective control through appointing the chairman and half the board -- highly profitable. Singapore, unlike Hong Kong, has also been pro-active in launching new financial products. Not all succeed but some do.

Most recently Singapore also approved "dark pool" trading with the creation of Chi-East, an offshoot of London based Chi-X. Dark pools are financial trading venues similar to exchanges although their trades are not displayed on order books, which is useful for traders seeking to move large numbers of shares without revealing themselves to the open market. Hong Kong meanwhile is still debating the merits of a dark pool platform.

But not all joint ventures and cross-holdings prove their worth. An SGX joint venture with the Chicago Board of Trade in 2006 was subsequently cancelled. And SGX now finds that the Tokyo Stock Exchange, which acquired a 4.9 percent stake in SGX, presumably as a path to cooperation, has been critical of the ASX acquisition cost. Maybe the Japanese have been learning that cozy relationships are no substitute for business logic.

History is replete with other failures. Magnus Bocker's OMX, itself a holding company for nine small exchanges from Armenia to Iceland via Stockholm, tried and failed to buy the London Stock Exchange in 2001. OSX fell to Nasdaq in 2008. Nasdaq too tried to buy the London exchange in 2006, again without success. SGX itself has a 5 percent stake in the Bombay Exchange. Euronext, which owns the Paris and Amsterdam exchanges merged with the New York Stock Exchange but has failed to get control of the Deutsche Borse.

Doubtless some of these mergers can improve trading systems which themselves increase trading volumes. OMX in particular has a strong reputation for technology. However, mergers can also be dismissed as a fashion driven more by competition for size than profits. They may also find that in future regulators will look more closely at the desirability of high-speed computerized trading systems which have no commercial logic or economic rationale other than generate profits for a small group of big institutions, and for the exchanges themselves but have no relevance to the vast majority of investors, whether retail or institutional.

These mergers also have little relevance to most investors. Though cross-border investment has been growing it is still relatively small. Most money stays at home even in this era of globalization and absence, mostly, of significant foreign exchange controls on portfolio investment in equities. But maybe we are the top of the liberal cycle there, as controls on hot money flows begin to spread.

As for those fortunate enough to own ASX shares, do not look a gift horse in the mouth. Take the money and run before the world realizes that this deal will probably not fly anyway given that it needs approval in Australia by a parliament and a government reliant on independent and Green party support.