A skeptical look at the marriage of two stock exchanges
This Canadian analyst reviews the history of foreign mergers with Canadian firms and concludes the TSX-LSE merger will not go through.
It’s the principle of the thing. But which principle?
At issue is whether or not governments should step in and rule on mergers between private corporations.
Is this reasonable oversight or unreasonable interference? Or is it sometimes good and sometimes bad? Does a foreign takeover of “strategic assets” justify greater vigilance by governments?
The specific merger we are looking at today is the proposed deal between the Toronto stock exchange and the London stock exchange.
We view it through the eyes of Mr. John Sartz, an investment executive who has never been reticent with his opinions.
In the latest issue of Investor's Digest of Canada he runs through several cases of the long arm of government coming down on mergers.
In a sense, he casts a pox on both their houses. He’s not enamoured of the idea of government interference in capital markets.
But he’s also not convinced that every merger is quite the win-win deal it’s cracked up to be, either.
Nor is he sure that the merger between the Toronto and London exchanges will do all the wonderful things it’s supposed to do.
He starts with the banks that wanted to grow bigger.
Blowing out their brains
13 years ago, Canada’s big five banks asked for the power to merge, arguing that they needed the extra size to compete in global markets.
Mr. Sartz points out that he didn’t like the idea and said so at the time in Investor's Digest of Canada. Yes, he agreed, a bank did need a certain minimum size for supports in its capital-intensive industry.
“Yet once a bank has grown to a certain size, there’s no evidence that further bulk is useful.” In fact, he notes, the inverse appears to be true in Canada. The larger the bank, the lower the profitability.
At any rate, investors should be grateful to the government for turning down the mergers. “Had it not done so, two or three of Canada’s big banks might have become as arrogant and as misguided as their counterparts in the U.S. and elsewhere,” says Mr. Sartz.
“And those folks, you’ll recall, blew out their own, as well as taxpayers’ brains, with their off-the-wall lending practices.”
But don’t take this to mean that he necessarily endorses government interference in capital markets, he adds. In fact, government intervention has often been “spotty,” he says.
A weak argument
He reminds his readers that Canada’s Foreign Investment Review Agency came into being in response to a friendly foreign takeover of Denison Mines (TSX-DML). That was almost forty years ago.
A U.S. company was prevented from taking over Denison and its uranium assets. Mr. Sartz notes acidly that “the takeover wouldn’t have led to the mine itself, or those working it, being transferred overseas.”
But a bunch of head office jobs were in jeopardy, he adds just as acidly, so the takeover was blocked. (Denison recently made a friendly and apparently unblocked bid for White Canyon (TSX/V-WU; ASX-WCU), which is based in Australia and owns a uranium mine in Utah).
Nor would this analyst be surprised if shareholders of Potash Corp. of Saskatchewan (TSX-POT) looked back on the government’s roadblock to its takeover by BHP Billiton (NYSE-BHP) as a costly victory.
“I suppose there’s an argument, although a weak one, to be made for strategic assets.”
Which brings him to the proposed merger between the Toronto and London stock exchanges. Whatever the principle of the thing, his opinion is unvarnished. “I think it’s a stupid idea,” he says.
Deal will be blocked
A historical survey of mergers would show that the chief beneficiaries are often the investment bankers that “invent” them, comments Mr. Sartz.
Who, then, will benefit from the merger between the London and Toronto exchanges?
“As near as I can understand it,” says the analyst, “one of the merger’s selling points will be to give Canadian resource companies wider exposure through a listing in Europe.”
But why do they need a merger of the two exchanges to do it? And is such a listing even beneficial?
If regulators in Canada have a special affinity for resource companies, “ceding regulatory control to London just doesn’t make a lot of sense.”
Mr. Sartz returns to history. Two decades ago, Canadian banks thought it would be a good idea to list on the Tokyo Stock Exchange.
Japan had a half a dozen of the world’s biggest banks then, but “what Japanese investors were clearly missing was the ability to invest in Canadian bank stocks trading in Tokyo,” adds the analyst dryly.
Yet after a few thousand shares were traded, the Canadian banks de-listed and went home.
Mr. Sartz offers this conclusion to his readers in Investor's Digest of Canada. “Ultimately, whatever you and I think about the economic feasibility of the merger of the Toronto and London exchanges, the deal will in all probability be blocked.
“This won’t be because the stock exchange is a strategic asset, but because it’s a high profile one. Remember, in politics, optics will invariably trump logic.” Not to mention principle.
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