How the ASX-SGX merger failed
April 21, 2011
Treasurer Wayne Swan was in the South Korean coastal city of Gyeongju preparing for meetings with G20 finance ministers when he heard the news.
An adviser had to pry the politician's attention from his mountain of summit paperwork to relay the story hitting the news wires that Friday afternoon in October: the Singaporean and Australian stock exchanges were in takeover talks.
Swan was stunned.
This was a large, politically-sensitive transaction involving the possible sale of Australia's stock exchange and no one had sounded out his office beforehand, a common practice given Australia's Treasurer has the power to block deals involving foreign owners.
Swan, whose Singaporean counterpart Tharman Shanmugaratnam was also attending the G20 summit, knew from the beginning the deal was going to be a political headache.
It was just after lunchtime in Sydney that Friday when the Singapore Exchange and Australia's ASX Ltd both went into a trading halt pending an announcement about a "possible business combination".
The news sent traders rushing back to their offices and raised eyebrows in the Singapore market as the first media reports surfaced that SGX was planning a full takeover of the Australian exchange.
While Swan was distracted that weekend talking to finance ministers in South Korea about global growth imbalances, SGX boss Magnus Bocker and his army of bankers and lawyers worked around the clock to finalise the terms of the ambitious $8 billion takeover bid.
On Sunday, Bocker flew from Singapore to Sydney where the long battle to sell his stock exchange consolidation dream was about to kick into first gear.
The clearly excited SGX chief joined his Australian counterpart Richard Elstone on Monday morning to brief the media and investors on the deal their bankers code-named "Avatar", presumably named after the Hollywood movie about future humans invading an alien planet for its resources.
The duo wanted to create Asia's fourth-largest stock exchange through an $8 billion cash and shares offer for ASX, which would cut costs and enable the combined group to tackle new competitors.
"Magnus and I have not had a lot of sleep over the weekend. This is the beginning of what is probably five to six months of hard slog," Elstone told reporters gathered in the auditorium of ASX's headquarters that Monday morning.
He could not have been more right.
Junior partner
Just as the Treasurer felt he was kept in dark about the deal, the two chief executives were taken by surprise five months later when Swan delivered a swift rebuke.
They had deployed lobbyists to the Australian capital of Canberra, other global exchanges had since announced their own plans for mergers, and they had even amended the terms of the original offer to include more Australian directors on the combined entity's board.
This had little sway on the Treasurer who on April 8 described his decision to reject the proposal as a "no-brainer".
Swan, 56, who grew up in a country town in Queensland, is a key Labor Party power broker representing the right wing. Among his list of reasons were concerns about relinquishing control of the nation's clearing and settlement systems, and Australian capital and jobs moving offshore.
"Becoming a junior partner to a smaller regional exchange through this deal would risk us losing many of our financial sector jobs," said Swan, the father of three.
"So let's be clear. This is not a merger, it's a takeover that would see Australia's financial sector become a subsidiary to a competitor in Asia."
The decision threw a spanner in the works for the wave of exchange consolidation sweeping the globe and has left a cloud hanging over the future of the SGX, which needs to find new partners or possibly be swallowed up itself.
It also opened old wounds about Australia's ambitions to become a regional financial centre and raised a political storm domestically in Australia, where Swan's minority government relies on key independents to get laws passed.
Swan's political opponents and sources close to the exchanges said the official explanation was a smoke-screen for the real reasons the bid failed.
"A lot of them seemed to me to be quite emotional and xenophobic type issues," former ASX chairman Maurice Newman told a business lunch in Sydney on Tuesday, describing the failure as a lost opportunity.
The Singapore government's indirect 23 per cent non-voting stake in SGX was top of the list, according to sources, although this was something the Australian government could never say publicly.
While investors warmed to the offer immediately, politically the deal appeared doomed from the start.
Even with the government's blessing, Australia's parliament was seen as the biggest hurdle, as SGX would also need other political parties on its side as well to remove a 15 per cent ownership cap on the ASX.
Former Singapore Prime Minister Lee Kuan Yew's famous warning in the 1980s that Australia could become the "poor white trash of Asia" still resonates with some lawmakers, who are suspicious of the Singapore's government indirect links to the SGX.
However, others argue a culture of bigotry and nationalism robbed Australia of a genuine opportunity to use Singapore as a gateway into Asia and boost its efforts to establish Australia as a regional financial hub.
Twists and turns
In an unexpected twist, parliament never got to vote on the offer. Instead, word got out in late March that the government had already made its decision.
In a series of media leaks and statements, which analysts said raised questions about the independence of Australia's regulatory processes, it was clear by late March the bid was in its death throes.
At the time, Bocker and his advisers were focused on providing reams of documents and information to Australia's Foreign Investment Review Board (FIRB), a secretive panel of senior businessmen, who make formal recommendations to the Treasurer about whether a takeover is in Australia's "national interest".
FIRB had been expected to take another two months to weigh up the bid and Bocker and his advisers were settling in for the long haul when word came from his advisers in Australia on April 4. that something was up.
"The advice was that there could be something coming out in Australia. We weren't sure what it was," said a source with knowledge of the deal.
On April 5, the disconcerting news hit Bocker's desk.
FIRB had written to the SGX saying Swan was of the view that the bid should be rejected. Swan went public later that day, saying FIRB had advised him the takeover was not in the national interest and he "intended" to accept that advice.
FIRB was telling the SGX what Swan thought and Swan told the world what FIRB thought but no one was telling anyone what they actually thought themselves, Australian pundits noted.
Bocker quickly called a meeting at his office to discuss what should be SGX's next move and decided to go public with his views.
Bocker had launched the audacious cash-and-shares bid for ASX in October just 10 months into the top job at SGX. The slim 49-year-old Swede with a booming voice and a ready laugh is a glad-handing networker, a familiar character-type in the Australian business world. So the father of three children felt a little aggrieved by the tone of the rejection.
"Like us, he (Bocker) was very surprised on how strong the FIRB statement was," the source said.
The FIRB statement came after SGX and ASX had replied to more than 100 queries from the regulator relating to their merger proposal, sources with knowledge of the deal said.
Bocker later told reporters he was surprised because the letter contained no criticism of the proposed structure of the deal or the governance for the merged exchanges.
He was clearly annoyed, his mood not helped by technical issues with a chaotic conference call that afternoon as journalists and fund managers from around the globe scrambled to dial-in.
The rejection was a major blow, because the marathon-running Bocker had been discussing exchange consolidation with Elstone on and off for years.
Their relationship goes back to around 2000 when Elstone was running the Sydney Futures Exchange (SFE). Bocker was then chief operating officer at Scandinavian exchange OMX and was selling technology to the SFE for its next-generation clearing system.
The talk got serious around mid-2010 when new competition from alternative trading platforms ramped up pressure on exchanges globally to cut costs. Elstone's pending retirement was also a major factor in the marriage, as there would be no ego to stand in the way of Bocker's desire to run the combined company, the sources said.
Another key relationship was between ASX chairman David Gonski, who is on the board of Singapore Airlines. Singapore Air's CEO Chew Choon Seng is SGX chairman.
Lobbying efforts
Investment bankers, analysts and some media commentators were critical of the FIRB decision, and said the Treasurer needed to better explain the reasons for rejecting the deal.
"I think there should be more transparency on how the decision was reached. I think that would be in the national interest," Sydney University Economics and Business School Professor Alex Frino said.
"We have a decision by the FIRB, and a very short statement by the Treasurer. I think the market needs more information."
Others suggest the SGX was naive in the way it approached the deal. While Bocker had the ASX and its shareholders on board from the beginning, they failed to test the waters with the government or main opposition party beforehand.
The 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 has worked with current Prime Minister Julia Gillard, led the charge, while well-connected bankers at advisers UBS were also involved.
However, the lobbying may have started too late.
A majority of politicians and their advisers questioned by Reuters in the last week of March said they had little or no interaction with representatives from either exchange and the general feeling was that the deal was doomed.
SGX sources played this down, saying a lot of effort had gone into lobbying and they had confidence right up to the end of winning support from the government and the Opposition to get the deal through parliament.
Australia's minority government only holds power with the support of Greens and independent politicians and the SGX needed the opposition Liberals-National Coalition on board to get a deal through.
While the opposition's support for a deal was unclear, it didn't stop it from accusing the government of bungling the decision-making progress.
"Wayne Swan has turned Australia's international reputation into that of a third-world country. His bungled decision-making process has reflected poorly on Australia in what has been a complex commercial process," Australia's shadow treasurer, Joe Hockey said.
It was the first time the Australian government had rejected a major foreign takeover on national interest grounds since 2001, when Royal Dutch Shell's bid for Woodside Petroleum was blocked.
Swan said he would not oppose future deals if they protected Australia's financial architecture, enhanced the country's standing as a financial services centre in Asia, boosted access to capital for Australian businesses and supported growth in high-quality financial services jobs.
However, the ASX is now seen as largely off limits.
The deal's rejection also puts Bocker in a bind as he seeks other merger partners. Bocker has long had a reputation as a deal-maker. He joined Swedish exchange operator OMX in 1986 and made his mark bringing together seven Nordic bourses to form OMX AB, which he led between 2003 and 2008, before selling out to NASDAQ.
"I don't see myself as a dealmaker, he told Reuters last month in an interview. "I see myself as an operator. I like building, changing and growing exchanges."
Analysts say he'll be back in the fray after nursing his wounds from the bruising Australian bout, but he may not be the hunter next time, but the prey.
Financial exchanges around the world are chasing cross-border deals to build scale and cut costs amid increasing competition from alternative trading platforms such as dark pools.
The Tokyo and Osaka exchanges are in talks. Deutsche Boerse is competing with a partnership of Nasdaq OMX Group and IntercontinentalExchange to buy NYSE Euronext . The London Stock Exchange is looking to combine with Canada's TMX Group .
The ASX experience has left Bocker and the SGX poorer and perhaps wiser. The Singapore exchange last week reported a lower-than-expected net profit, after booking $S12 million ($8 million) in costs related to the failed takeover bid. Now, analysts say, the talk in the market is that SGX itself is a takeover target.
Bocker says he'll pocket the lessons learned and continue to seek out partnerships and strategic alliances, though nothing tangible was on the horizon.
"Of course with the lessons learnt from ASX we will see what other things we can do, in line with other exchanges as well. So nothing specific."
Reuters
Companies that are getting into trouble
Someone told me DBS stands for "Damn Bloody Slow"
