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Global bourses merger: Dwarfed Asian peers watch and tread water

SINGAPORE -- Consolidation among the world's leading security exchanges in Europe and the U.S. is set to leave Asian exchanges behind in terms of size, but the wave of cross-border acquisitions is still some distance from these shores, analysts say.

     Deutsche Boerse and the London Stock Exchange Group (LSE) agreed to merge on Wednesday in a deal that will create the world's biggest exchange by revenue, if it goes ahead. There is, however, a possibility that Intercontinental Exchange (ICE), owner of the New York Stock Exchange, may escalate a bidding war as it had earlier indicated an interest in buying the LSE.

    News of the proposed merger drew muted reactions in Asia on Thursday, with the share prices of major listed bourses largely unaffected. Singapore Exchange and Hong Kong Exchanges & Clearing edged up slightly, with SGX rising 1.2% to 7.86 Singapore dollars and HKEx up 0.8% at 175.2 Hong Kong dollars. Japan Exchange Group (JPX) dropped 0.7% to close at 1,743 yen.

     As mega exchanges are being created in America and Europe, "Asian exchanges may be feeing the competitive pressure," said Carmen Lee, analyst at OCBC Investment Research in Singapore. But she was dismissive of the idea that it would lead to industry consolidation in the Asian region.

     SGX is believed to be the one regional exchange that is on the lookout for deals. The Singapore bourse has explored growth through mergers, bidding for the Australian Securities Exchange (ASX) in 2011, before being rejected by Australian government. An SGX executive later said that ASX was its only possible regional target at that time, in terms of its openness to foreign shareholdings, as well as its level of regulation and market infrastructure.

     Unable to find a suitable match within the region, SGX has shifted its focus onto establishing external trading links with exchanges in Southeast Asia -- a tie-up arrangement that does not involve equity investment. But even this sort of partnership has not taken off.

      In late February, SGX disclosed that it was bidding to acquire London-based shipping information provider Baltic Exchange, a move that is expected to enhance SGX's commodity and derivative markets. An SGX spokesperson declined to comment on the LSE-Deutsche Boerse merger on Thursday.

     "Exchanges in Asia are generally seen as a national asset, much like airlines. I don't see the politicians letting [cross-border consolidation] happen," William Barkshire, a former LSE executive now running a markets advisory in Hong Kong, told the Nikkei Asian Review. He said the LSE-Deutsche Boerse merger would not have any short-term impact on the Asian exchanges landscape.

     A spokesperson for the Hong Kong Exchange, however, said the London-Frankfurt combination was "obviously a major transaction and we will be watching it closely."

     HKEx took a big step ahead of SGX when it acquired the London Metal Exchange in 2012 for $2.2 billion, stamping its mark on the global commodity and derivatives market. The Hong Kong bourse has also been strengthening ties with its mainland counterparts, through a cross-border equity trading link with Shanghai in 2014. Although its launch has been delayed, another trade linkage with the Shenzhen Stock Exchange is in the pipeline.

     The two mainland Chinese exchanges of Shanghai and Shenzhen are both owned by the state. Lee of OCBC said "it is not impossible" for these to acquire some privatized exchanges in the region, but there would be hurdles such as gaining regulatory approvals from the government.

    When seeking growth, the exchanges in the region will continue to build "alternative ways of partnerships" with counterparts in and outside of the region, she said.

    JPX, operator of the Tokyo Stock Exchange, is much more detached from the global trend of mergers and acquisitions. "Unlike in Europe and the U.S., the stock exchanges in Asian countries have a national color, therefore the cross-border merger will unlikely happen in Asia," its spokesperson told the Nikkei Asian Review on Thursday. He said that the group will not actively consider a merger with foreign stock exchanges, and does not own exchanges beyond its national borders.

   The spokesperson added that Tokyo will not be much affected by the merger of the London and Frankfurt bourses, because Tokyo is "not competing [with big exchange groups] over the stock market." Indeed out of 3,512 listed companies in Tokyo, only nine of them are non-Japanese, one of whom is the Malaysian infrastructure group YTL. "Japanese companies mostly choose us for listing, and we are not chosen by foreign companies," he said.

     However, there was a time when the Tokyo bourse aspired to attract companies from abroad. Its "foreign division" was established in 1973 for the purpose of luring mainly American and European companies, and at its zenith in 1991, it had 127 companies listed. But as the Japanese stock market bubble burst and its economy entered a long period of slump, the bourse lost its luster. Companies such as Nestle, HP, BP, Boeing, Deutsch Telecom and, mostly recently, South Korean steel giant Posco, all left Tokyo.

     Its newer strategy to target Chinese companies kicked off with fanfare in 2007, but also failed. The very first company listed, Beijing-based Asia Media, was forced to delist after just a year and half, when a senior executive was found to be embezzling corporate funds for his personal use.

    Hiroshi Torii, a Tokyo-based analyst covering JPX at Deutsche Bank, said: "JPX's M&A strategy should focus more on complementing products [that it doesn't have], rather than complementing areas." He said that regulation in each country would be a big hurdle for cross-border integration, and does not consider investing in foreign exchanges at a premium to be a good strategy.

     From a financial perspective, it is not a good idea either, Torii added, as running an exchange "is a system business." The benefits of integration come from cost cutting, and, as JPX's operations "do not overlap with foreign exchanges," joining forces would not be advantageous.

Nikkei staff writers Kentaro Iwamoto in Tokyo, Joyce Ho in Hong Kong and Nikkei deputy editor Kenji Kawase in Bangkok contributed to this story

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