Exchange merger raises questions


The proposal to merge the holding companies that operate the Toronto and London stock exchanges is giving politicians, regulators and listing companies a pile of headaches at an awkward time.


The deal’s principals argue that the merger, which would create the world’s largest exchange based on the number of listings, brings a slew of benefits. These range from lower costs, new products and better access to capital for Canadian companies. “(The) agreement both protects Canada and opens important opportunities for growth,” said Thomas Kloet, chief executive officer of the TMX Group, which operates the Toronto Stock Exchange in a statement last week. “It is our obligation to look to the future and ensure competitiveness not just tomorrow but for decades to come.”


However with an election looming and Canadian economic nationalists still cleaning their guns following their victory in blocking BHP Billiton’s recent attempt to acquire Potash Corp. of Saskatchewan, Kloet will have his work cut out in getting the public to buy in.


Opposition mounts

Opposition is already starting to mobilize. “Politicians need to consider the longer term impacts of the proposed merger,” noted leaders of CIBC World Markets, National Bank Financial and TD Securities and several other financial institutions in an open letter opposing the move. “The TMX is a key component of our capital markets.  Its primary role is to provide a venue for investors to supply the capital that companies need to grow at home or abroad. Policymakers must consider the longer term implications of the proposed merger.”


Turning over control of Canada’s stock exchange to foreign interests isn’t something that should be done lightly.  As the deal’s opponents note: “the priority of the new entity would be less likely to focus on the likes of a junior exploration company in Saskatchewan, a software developer in Kitchener-Waterloo, or a specialty manufacturer in eastern Canada.” That’s particularly important, because while large businesses, who would be the main possible beneficiaries of the new exchange, get a lot of ink, it is new, small and medium sized companies that create the vast majority of jobs in Canada.


In fact even many of the benefits promised to big businesses appear to be overblown. For example, the LSE/TSX merger is supposed to provide Canadian stock issuers increased access to global capital markets. However that option already exists today. Yet only 17 Canadian companies have bothered to cross list on the London Stock Exchange, and 81 percent of trading for those companies takes place in Toronto.


Deal opponents also argue that more than 750,000 Canadians are employed in the Canadian financial services industry, and that any merger, in a bid to create new efficiencies would put many of those jobs in doubt.


Another problem is that while many aspects of the exchange listing business are to remain in Canada, there is no guarantee that all of them will. For example Montreal’s derivatives exchange and venture capital expertise in western Canada will both be in jeopardy, as will Toronto’s hopes of ever becoming a global financial services hub, deal opponents argue.


Who gets ultimate control?

 The TMX Group somewhat shot itself in the foot when it announced the deal, by denying that control of the new group would shift overseas. “This merger of equals will benefit stakeholders of both organizations,” said its chairman Wayne Fox at the time.  The TMX Group also noted that the combined entity will have a “joint headquarters in Toronto and London,” and that its president will be Canadian, as will almost half of its board.


However left unsaid is the fact that the majority of the board will be non Canadian. And since TMX Group shareholders will get only 45 percent of the stock in the new company, compared to 55 percent for the London Stock Exchange Group, there is no guarantee that there will be any Canadian members, after the board comes up for reelection.


As for combined headquarters; well, Queen Elizabeth and her butler have combined headquarters.


But while we can’t be certain, it is believed that the butler does not have much say in the operation.




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