Broking firms merge while future of the Stock Exchange is up in the air

Friday 19th January 2001

By Chris Hutching

More New Zealand broking firms will merge in coming months, seeking long-term business efficiencies while debating the future of their Stock Exchange.

But they deny the mergers and acquisitions are defensive moves ahead of a possible merger of the New Zealand and Australian stock exchanges.

ASB Securities is understood to be eyeing Merrill Lynch's private client business as the market digests the significance of the Dunedin-based Forsyth Barr's expansion into the North Island.

ASB's Tim Preston said the mergers and acquisitions were just part of a trend that had been going on for years.

"When I came into this business 20 years ago they were saying the market was over-serviced. And markets have changed too, with investors buying investments offshore. It's a volume game and brokers are looking to reduce costs. The plan to merge the stock exchanges may have had some influence but it's mainly coincidence things are happening at the same time."

He said whether all equities markets needed to merge was still an open issue. A merged transtasman exchange was a long way off yet in any case. But Mr Preston said he supported an enabling bill to be presented in Parliament that would pave the way for demutualisation, providing flexibility and options for the future including listing the exchange.

Although poor performance of company managers has disappointed local investors in recent years, Mr Preston was bullish about the performance of New Zealand stocks in coming months. The US market was no longer a sure bet and capital would be driven to markets like Australia and New Zealand, he said.

One of the biggest New Zealand-owned firms in he financial services sector now is retail sharebroker Forsyth Barr. Late last year Forsyth Barr merged with Frater Williams, combining the strengths of a growing funds management and advisory network with a larger Auckland client base, according to managing director Neil Paviour-Smith. It has also bought Auckland-based Cavill White Securities, lifting the total number of client advisers under the Forsyth Barr umbrella to 90.

Mr Paviour-Smith said the recent moves continued a trend that had been evident for some time and alliances had been made with like-minded business partners keen to remain New Zealand owned.

On the question of a proposed merger of the stock exchanges, Mr Paviour-Smith said brokers were still waiting to see a specific proposal and until then he could only comment in a general philosophical way. The poor performance of local equities had been overstated because analysts and investors often failed to consider gross returns including dividend yields.

The NZSE40 capital index was sometimes a misleading indicator of market performance, reacting to such things as ex-dividend adjustments and it was narrowly focused, he said.

There were grave concerns about merging the stock exchanges including costs issues. Proponents of a merger would have to demonstrate how any benefits would offset higher costs.

There were also concerns about whether the merger would affect New Zealand capital raisings, Mr Paviour-Smith said.

The enlarged Forsyth Barr would probably be the biggest broker in New Zealand and the largest locally owned funds manager. Last August Mr Paviour-Smith took over the reins as managing director at Forsyth Barr in a restructuring initiated by founder and chairman Eion Edgar

Forsyth Barr also operates a rapidly growing investment portfolio service for clients with funds under management of $500 million. The aim of the merger will be to grow this and other funds substantially.

Traditional lines in the financial services industry are being blurred between broking, retail and wholesale services, funds management, and advisory services, with cost benefits for firms but some risks for clients who may be unsure about the independence of advice they receive.

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