Demutual interest

Sunday 1st April 2001

Will ordinary punters benefit from the turmoil in the investment business? By Fiona Rotherham

Hands up who hasn't seen Bill Foster's mug lately? Whether it's to do with the Montana take-over, the failed merger talks between the Australian (ASX) and New Zealand Stock Exchanges or the demutualisation of the NZSE, managing director Foster's wan smile has been all over the place. Surprisingly, this could be good for investors. For one thing, it gets the otherwise ignored topic of New Zealand investment into everyone's lounges. For another, behind the headlines some much-needed navel-gazing is going on by the local share-broking community and the exchange itself.

There has been a flurry of share-broking mergers. Forsyth Barr merged with Frater Williams and then Cavill White, to create New Zealand's largest retail share broking and funds management firm. ABN Amro merged its retail advisory business with Craig & Co to form ABN Amro Craigs. That, in turn, has taken over Merrill Lynch's retail broking business, following Merrill Lynch's exit to Sydney.

More Sydney moves are expected. "The revenue being generated from New Zealand is less than what these guys [Merrill's decision-makers] are being paid," says DF Mainland investment banking head Wayne Collins, formerly with Merrill. "New Zealand is a low-flying aircraft just above ground level on their radar screen."

In reverse of the trend, JP Morgan (previously known as Ord Minnett) was purchased by Chase, and Macquarie New Zealand has set up a local broking arm to complement its merger and acquisition business. Rumour has it the NZSE-ASX merger negotiations sparked several Australian-based share-broking firms to look this way.

The upshot

What's the impact on investors like you? On the downside, broking fees for private clients won't fall further very soon. That's a function of the decreased competition likely now that the ASX-NZSE merger has failed, says Guy Hedley, managing director of BNP Paribas Equities Private in Sydney. The number of brokers in Australia is higher, the fight for business tougher and fees lower, he says. Moreover, many brokers claim New Zealand is still over-brokered and there will be more mergers to come.

On the upside, service may improve. The way the Forsyth Barr Group sees it, the newly merged companies will have greater geographic spread, more brokers and will do more research. It's likely its company will increase the number of analysts focusing on small to medium-sized companies (often ignored by the large international firms) from three to five. Whether all this consolidation brings better independent advice remains to be seen. As big firms increasingly turn to investment banking and corporate advisory business, their analysts' research is becoming more sales-oriented and less useful to investors.

The biggest impact on share market investors should come from demutualisation and the potential listing of the NZSE. The bill allowing the exchange to switch from mutual ownership to become a company is expected to be passed by Parliament in June. It will then need the approval of 75% of the exchange's 300 voting members, with votes to be taken in August. A "yes" vote looks likely; even the merger's opponents, who wanted to keep sovereignty over our own share market, support demutualisation.

It's also the tenor of the times. A survey at last year's annual conference of world stock exchanges found that over 80% had already demutualised or were seriously considering demutualisation. The ASX was the first to list in 1998. The benefits to investors are obvious, it claims. The ASX is proactive in expanding the market: total market capitalisation has doubled in five years. It has also succeeded in broadening the market's appeal: the ASX now has 17,000 shareholders, and share ownership in total has risen to 54% of the adult Australian population. New Zealand share ownership, by Unlimited's count, is below 20%.

Yes, the NZSE has reduced transaction costs to the cheapest in the world - from $8.50 when screen trading was first introduced in 1991, to 60 cents 10 years later. Australia is double that. But, arguably, that's all the exchange has done. As Wayne Collins says, from a public relations and marketing point of view the NZSE has been "bloody dreadful", and it hasn't been tough enough on errant companies. Shareholder advocate Bruce Sheppard agrees. He says the exchange has failed to take proper responsibility for regulating the capital markets.

The NZSE has been an old boys club for too long, argue the critics. "The NZSE, as currently structured, appears to neglect the interests of its wider membership and owners," says Roy Borgman, chief executive of South Island-based broker and investment firm, Greenslades.

Will this all change when or if the exchange lists? Opinion is divided. Critics say a new structure means little without a change in management. "It's people that effect change," Sheppard says. The exchange's attitude toward retail investors needs to shift, in keeping with the upcoming Takeovers Code and insider trading review, to restore investor confidence in the market, say the critics.

"Bill Foster has served his time," Collins says. The Montana takeover has raised serious questions in investors' minds as to whether the exchange is there to protect small shareholders, says ASB Securities managing director Tim Preston.

Others argue that demutualisation will force management to be more transparent and accountable. A more commercial focus, including extended trading hours, will come at a cost. Foster admits costs are likely to rise, although not as high as they would have had the ASX merger gone ahead.

Listing also opens the door for takeover. Local share brokers favour a cap on overseas ownership of around 5%, like that currently imposed on the ASX, although this is soon to be lifted to 15% to allow more flexibility - share equity swaps with other exchanges, for instance.

One thing's for sure: Kiwi brokers want to ensure a full debate on relinquishing local control is heard, before it happens. Now that is new.

Fiona Rotherham
fiona@unlimited.net.nz

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