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Australian bourse merger may not be popular but it would be sensible

The Australian government is close to a critical decision that will change the way the country's investors do business.

The Australian government is close to a critical decision that will change the way the country's investors do business.

It will either give approval for the Australian Stock Exchange (ASX) to be taken over by the Singapore Exchange (SGX) and drag it into the world of supranational investment, or it will cave in to local interests that want to protect the exchange from foreign influence.

The chances of Singapore receiving the go-ahead are not good. It is now about politics as the deal has to be passed by an array of government bodies, and Singapore will have to convince too many people that the takeover is not detrimental to national interests.

The government of the prime minister Julia Gillard is highly unlikely to give its blessing and opposition parties are about to start a public campaign to block the takeover.

Pressure is mounting on the ASX, however. It considers itself to be a leader in mining and energy listings worldwide, but it will lose its supremacy with the merger of the London and Toronto exchanges, which will represent a total market capitalisation of US$5.87 billion (Dh21.56bn).

As the Australian investment manager Mark Nathan said this month, the merger almost has to go ahead if the Australian exchange is to compete globally.

"The Toronto-LSE tie-up only adds to the argument that you can't be an island in the global exchange landscape," Mr Nathan said. "It will certainly focus the minds of politicians."

It is not just about the LSE-Toronto deal. New York's Nasdaq OMX and Chicago's Intercontinental Exchange are the latest bourses considering a marriage, with the pair supposedly on the verge of a joint, hostile counter-bid for the New York Stock Exchange Euronext.

The NYSE Euronext has already agreed to a $10bn merger with the Deutsche Boerse.

The main argument for a merger between Australia and Singapore is that they need each other to create a super-exchange for greater economies of scale at a time when electronic exchanges are gaining market share.

But there are even more cogent arguments that demand a shake-up in Australia, one of which is that there is no diversification in the country's share market.

About a quarter of listed stocks in the main ASX 200 index account for 80 per cent of its capitalisation. Eleven stocks in the index account for half of the index and 20.3 per cent of the market is BHP, Rio, Newcrest and Woodside. The Big Four banks are 21.4 per cent and Woolworths, Wesfarmers and Telstra account for another 10 per cent.

If BHP doubled in price and the other 199 top stocks had an average return of zero, the market would still go up by 12 per cent. The index performance is not an average; it gives no reading of the combined state of listed corporations.

The problem with the ASX-SGX combination is that it is not a merger but a takeover, albeit an extremely sweet one for ASX shareholders.

SGX offered $8.4bn in cash and scrip for the ASX in October, pricing ASX shares at about $48 each - a 37 per cent premium to its value at the time.

The deal has been held up and the offer now stands at about $42 a share because of falling stock prices and fluctuating foreign exchange rates.

The deal is in both parties' interests. Singapore needs to strengthen its expertise in financial services while Australian institutional investors need a larger investment universe.

Australia now has a superannuation pool of about $1 trillion, which is expected to grow to $5tn by 2030. The biggest local companies receive most of this money but with Singapore running the show a decent-sized market for bonds, which is lacking in Australia, is likely to open.

Nobody likes the psychology of a takeover but the ASX risks being marginalised as the rest of the world takes advantage of increased liquidity and the corporate synergies of an international marriage.

When the bottom eventually drops out of the resources boom and China runs out of steam, there will be no prizes for guessing which exchange will be treated as the lesser spouse.


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