Exchange merger a 'no-brainer' Australians say

Friday 16th February 2001

NICHOLAS BRYANT went to Sydney to find out what Australians think about merging stock exchanges - and found they think they hold all the cards

THE BIG PICTURE: The Australian Stock Exchange indulges in window dressing but, unlike its New Zealand counterpart, it's in good heart. Expatriate Kiwi broker Guy Hedley (above) sees the ASX, despite its shortcomings, as an ideal partner for the NZSE

When electronic trading replaced the boisterous jousting of the chalk-on-board trading floor, much of the visible excitement of the New Zealand and Australian stock exchanges was lost.

But the two exchanges have taken a very different approach in their attempts to replace that dynamism and energy.

The ASX became an electronic exchange in 1987, ironically on the day the stock market crashed.

But in its place on the ground floor in Sydney's Bridge St there is a celebration of the world's capital markets: three big screens, continuous business news, equities trades, commodity prices, mining boards and ample seating - there are even plans for a restaurant to open soon.

On an ordinary Tuesday afternoon about 30 investors observe the screens - many of them making small notes, rings and slashes on the market pages of the day's paper. Other days there are many more keen investors.

"Do you have anything like this?" ASX media relations manager Gervase Greene asked.

"No, I don't even know where our Stock Exchange is," I had to reply.

And the ASX has other rituals that are hard to imagine on this side of the Tasman.

There is a bell below the largest of the viewing screens. When a company has gone through the trials of building a stakeholder base, raised capital and taken the often nerve-racking plunge into the share market, a small ceremony is held. The bell is rung as the company's shares begin trading and the ASX welcomes it to the market with champagne - its treat.

This is, of course, all window dressing but it says a lot about the differences between the two stock exchanges. Theirs is in good heart, ours is not.

So, aside from how different we obviously are, I came to Australia to find out whether we can be similar enough to do business together.

Australians believe our sharemarket is unsustainably small. Their view is merging is a no-brainer - join them or watch our attractiveness to both domestic and international investors diminish even further.

If that sounds dramatic, just mull the reality of the vast differences in market capitalisation between the two exchanges: a measure of the total value of the companies trading, arrived at by multiplying the number of shares issued by the current share price.

Australia: about $A700 billion in domestic funds and about $A1 trillion all up.

New Zealand: about $40 billion total, down about $8 billion since the first quarter of 2000, after Lion Nathan, Nufarm and Brierley Investments decided to change their domiciles.

Yet some local market players who don't favour a merged exchange see us as having a future as "a vibrant market that creates value for all stakeholders," or "an independently run, New Zealandgoverned organisation," the view of anti-merger campaigner and Infratil chairman Lloyd Morrison.

Yet the Australian Stock Exchange doesn't necessarily see itself as a sustainable capital market, even with that market cap. It too fears the departure of companies and tightening of purse strings by foreign broking houses and investment banks.

For that reason it has embarked on laying the foundations of relationships that will eventually see it trading on a far wider format.

During the next two weeks the ASX will begin fully tested trading into the US of shares on the Nasdaq and NYSE.

This could provide advantages and savings for the NZSE, advantages expatriate Kiwi broker Guy Hedley sees clearly.

"What is the logic in having a very, very small market pursuing a different strategy from a larger market which is comfortable for it to be part of that now? " he asked.

One year into a job as managing director of private-client-focused BNP Paribas, Mr Hedley said he recognised shortcomings in the ASX but saw it as a vastly better market than the NZSE, and an ideal partner.

"Why is any other market going to pay to integrate into the New Zealand market anyway? I mean it's illogical."

And he has no time for merger critics he sees playing on traditional prejudices such as the belief Australians will treat us as underlings and pointless references to sporting rivalries.

"You have to realise the ASX is debating economics. I've seen no example of the prejudices against New Zealanders or their companies which are being mentioned. I think we've gone some way beyond that," Mr Hedley said.

The ASX has appointed chief financial officer John Hayes as project manager for merger talks.

But, despite being known as a nice guy, Mr Hayes is also an old-fashioned accountant at heart.

"If it's not worth it for us he'll dump it ... he's not a man driven by Anzac sentimentality and it must be of value to the ASX," one source said of the merger proposition.

But before such a decision can be made more talking must be done.

It is understood ASX chief executive Richard Humphrey and chairman Maurice Newman will meet, probably in Sydney, with the NZSE's chairman, Simon Allen, and managing director, Bill Foster.

That meeting, to be held within the next two weeks, will not deal with technical issues - only whether a viable environment exists for a deal to be done.

The key question from NZSE's point of view, is whether enough of its 275 individual members are likely to accept a merger proposal.

The Australians will be deciding whether the merger has enough chance to keep putting resources into it.

One thing troubling some NZSE members is the extent to which the Australians are believed to be brokering the merger on their own terms.

Being a listed company the ASX is not commenting publicly on the issue two weeks out from its annual results, fearing damaging conclusions being reached by analysts.

But one likely sticking point is the local preference for the ASX to maintain the identity of New Zealand companies under some sort of separate umbrella identification on the ASX.

"There will always have to be some sort of secondary or grey market for our companies under any exchange ... our companies are just so small," a local broker said.

The Australian market is universally against keeping New Zealand stocks separate within the ASX structure.

Singapore's top-20 stocks will soon trade on the ASX under a separate banner, showing the market is willing to protect foreign identity, but that is a trading arrangement, not a merger.

"I wouldn't support any separate identification. It reeks of the China index and would evoke memories of it for investors.

"I'm in favour of a full, even board if Australia and New Zealand merged ... you don't want to be blacklisted as a China-board stock," Australia's longest serving financial columnist, Trevor Sykes, aka the Australian Financial Review's Pierpont, said.

The China index traded a collection of Chinese stocks on the ASX in the mid-1990s and increasingly suffered through investors' mistrust over different requirements for prospectuses, corporate governance and trading practices - all issues that would need careful attention before a transtasman merger could take place.

"To Australia a merger would do sweet Fanny Adams, the benefits would be far greater to the other side as the market would provide Australia only slightly more depth and liquidity. We're fairly vigorous about rules here ... I wouldn't support it unless the disclosure regimes were equal," Mr Sykes said.

All agreed it would be foolish to see the ASX as a panacea for all our ills.

But they're considered small compared with the big picture, the wider econo-political reality of whether the NZSE should slip through what is now a narrow window of opportunity and merge with the ASX.

That issue was very much simpler.

"If we're the cabin boy of the world's equity markets, then you're the ship's cat. We feel pretty isolated down here and adding New Zealand doesn't add any appreciable mass. But population drift is giving you the answer - most New Zealanders with any talent come to Sydney," Mr Sykes said.

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