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Special Report: A Tale Of Two Exchanges

By Phil Boeyen, ShareChat Business News Editor

Wednesday 20th December 2000

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When the NZSE and the ASX first announced in August that they were considering a merger the details were short and sweet. After meeting in Sydney the chairmen of both exchanges said, "It was agreed that merging the two stock exchanges and their markets had sufficient merit to warrant more detailed investigation."

Since that day the idea of bigger is better seems to have taken sway over the process and given it a life of its own. Words like 'inevitable' pass the lips of a number of commentators, and given New Zealand's self-image of a tiny fish in an ocean of larger financial sharks, the move at first seemed like a foregone conclusion.

However the deeper one dives into this ocean the murkier the water gets.

At a basic level the pros and cons of a merger can relatively easily be written down and compared. For example, one pro is that New Zealand companies will have greater exposure to Australian investors, and presumably greater exposure to international investors who currently consider the Australian market worth a look but don't warrant New Zealand a glance

But just because New Zealand stocks get more exposure doesn't mean that Australian or international investors will be any more kindly disposed towards them, and could mean they just get lost in the noise of a larger exchange. Is that worth the risk?

Chemicals producer Nufarm, which shifted its operations to Australia early in 2000, has not found itself in favour as an investment just because it moved across the Tasman, and in fact has continually decried its undervalued share price.

Added to this are concerns within Australia itself that it is losing out on global investment money.

The Sydney Morning Herald quotes AMP and Coles Myer chairman, Stan Wallis, saying "investment sentiment... has rendered Australia almost irrelevant in world markets."

"There's been a host of reasons why the money has gone elsewhere but there has just been a steady decline in Australia's relevance as a destination for investment and we have to find ways to turn it around," he told the paper.

At some point the basis for any merger decision returns to a simple question - why?

If the answer is "to makes things better" the next question becomes "better for who?". New Zealand companies? New Zealand investors? The New Zealand economy? New Zealand brokers?

Taking the last first, one broker at a medium-size broking firm says she feels undecided about whether a merger will be good or bad overall but admits to seeing some advantages for her clients in terms of investing in Australia.

Her firm doesn't have an Australian office and she says it would be an advantage to be able to buy shares in Australian companies directly via a merged exchange rather than using an agent.

However she still sees considerable difficulty with the merger from a logistical point of view such as trying to combine different currencies, different trading systems and different opening hours and tax systems.

"I doubt that the concept, if it goes ahead, will happen by the middle of 2001. The logistics of the exercise is a huge hurdle and two years down the track is a more likely scenario," she says.

As for larger broking firms, who do have Australian offices, there are likely to be cut-backs in the New Zealand side of their business as they find the oft-touted 'operational synergies' (usually an analogy for staff cuts) and either move brokers to Australia or let them go.

Its those kind of potential losses which have galvanised Wellington-based broker Ian Waddell to actively organise opposition to the merger in the form of a campaign called "Stop the Takeover" launched this week.

Mr Waddell's employer Macquarie New Zealand is neutral on the merger but he has strong personal views and says if the takeover goes ahead it is estimated that approximately 300 jobs will be lost in the financial services sector.

"The immediate fiscal effect for the Government is approximately $15-40 million in lost taxes, with a further effect a glut of commercial and residential property on the market in Auckland and Wellington."

Mr Waddell also believes that surviving businesses will face higher costs.

"Larger New Zealand broking firms will have to foot the bill for a systems upgrade costing A$500,000 a year. Smaller brokers working through a bureau will find their costs rising from NZ$10 per transaction to A$50."

Where Ian Waddell is coming from, in essence, is that any merger needs to be looked at in terms of how it will affect the economy as a whole.

"It is vitally important for New Zealanders to understand that the sale of the exchange is not an esoteric subject to be discussed at the dining tables of the Wellington and Northern clubs."

"If the proposal proceeds, New Zealand will be the first country to sell its stock exchange. It will be surrendering a big slice of its economic destiny for dubious returns. This at a time when politicians of all persuasions are pontificating about the need for New Zealand to build on the knowledge economy to safeguard our economic sovereignty."

But isn't this wider view taking things a little too far? Isn't it giving more kudos to the NZSE than it actually deserves? And aren't we forgetting that the people who own the exchange are the stockbroker members - why should anyone else have a say in their company?

It is worth taking a moment here to try to understand the function of a stock exchange and who it affects.

At its most basic a stock exchange is just a marketplace for bringing together buyers and sellers of a product - in this case shares. Surrounding this marketplace though are hundreds if not thousands of people who give advice on whether the products are worth what the market is paying for them.

When an investor buys from this marketplace (the NZSE) there is no guarantee that the product will be a good one, although the market's operators do promise that the company which issues the shares has abided by certain rules and regulations.

Economist Alex Sundakov from the Institute for Economic Research says who owns the exchange is irrelevant to how the market works, and he believes any merger will have little effect on the economy.

"Investors don't make a decision on whether or not to buy a company's shares based on who owns the exchange. They look at the company itself."

Mr Sundakov says in many ways a defacto unified exchange already exists because of the lack of arbitrage problems between the dual-listed stocks, and he believes the main issue facing any merger is the question of tax.

"Currently New Zealand companies grow to a size where they have a significant Australian shareholding and then move their operations because the majority of shareholders demand the tax benefits."

He says the currency issue is also important and believes that if the merger goes ahead there will still need to be two separate boards to allow for trading in New Zealand and Australian currencies.

Mr Sundakov also had doubts about the argument that a merger will see a shift of analysts to Australia because the whole reason they are here in the first place is to watch companies that operate in New Zealand and that is not going to change.

Which brings up another question - will we see companies move offshore just because the exchange is based in Sydney?

It makes sense to think that when a marketplace shifts its geographical location then the people whose products are bought and sold, and those who makes a living from advising on the products, might shift too. As Brian Gaynor points out in the NZ Herald, this is what happened when regional stock exchanges in New Zealand were replaced by the NZSE in 1989, and the number of company head offices in the South Island dropped.

But do companies shift their head offices to where the marketplace (exchange) is based, to where their major markets are, or to where most of their shareholders live? Or is it a combination of all three?

Companies who have already left New Zealand for Australia such as Nufarm say they do so because most of their market is there. That makes business sense, and it would also tend to put paid to concerns that just because shares are listed on a Sydney-based exchange we will see companies such as Restaurant Brands, who have all their business in New Zealand, heading overseas.

Ask NZSE boss Bill Foster about the merger and he is quick to point out that it is wrong to present it as a fait accompli.

"We still do not even have a proposal to put to the groups, so any talk of who should have a say in the process, or what the issues are, is premature until a proposal is on the table."

What has been made public is a list of 12 NZSE 'propositions and responses' that deal with the merger. These cover such issues as the likelihood of head offices moving to Sydney and what impact a merger will have on New Zealand's capital markets.

Although the NZSE stresses that the propositions and responses are in draft form they do appear at first glance to be written in favour of a merger.

For example one proposition which states that "A merger will result in higher transaction and compliance costs" is given the response "Overall costs will rise initially but longer term the benefits are expected to outweigh this with greater liquidity, broader investment interest and potentially lower unit costs. "

That's a pretty positive take on the issue.

Without doubt a merger looks to be financially lucrative to full members of the NZSE, and this too has drawn criticism that a decision with such wide-ranging implications for the country may be left in the hands of those with an immediate financial interest.

According to Ian Waddell the exchange currently has shareholders' funds of approximately $6 million, and continuing to trade in its current format is worth around $8 million or $28,000 for each of its 279 members.

However before any money can change hands the government needs to change the law to allow the exchange to demutualise, and then a 75% majority of NZSE members will need to vote on the issue.

About the only thing becoming clearer on the whole merger question is that it looks to be much more complex than first thought - something not lost on both the ASX and NZSE.

The exchanges were due to make an announcement this week on where the merger talks were heading, but on Tuesday ASX boss Richard Humphry said, "while exploratory discussions have progressed... additional work is necessary before determining the merits of any merger."

"In the New Year wider discussion and consultation about the issues raised by the possible merger will be pursued in New Zealand. The parties are now working to finalise the initial phase of the discussions in the first quarter of 2001."

With New Zealand political opposition to the merger appearing to gain ground despite the support of Treasurer Michael Cullen, and now a fully-fledged campaign against the deal, the trans-Tasman exchanges may be starting to realise they have a much tougher job on their hands than first thought.

They will certainly have to work hard to convince critics such as Ian Waddell.

"At the end of the day, you're left with that old adage, "if it ain't broke, why fix it?" That's a question all New Zealanders need to ask of their politicians."

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