FMX | Connect – www.fmxconnect.com - (Reported 12/17/2010)

The ASX-SGX merger could fail Australia's national interest test

The proposed SGX cross-border acquisition of ASX is not a new thing  - eg, NYSE acquired Euronext, NASDAQ acquired OMX and the LSE acquired Borsa Italiana. In all these cases, the larger, most efficient entity took over the smaller target.

The peculiarity of this case is that  the smaller and less efficient SGX is taking over ASX, whose market in equities is 2x larger, 4x more liquid and 6x cheaper for its users

SGX afforded to make an offer to acquire ASX given its protected national monopoly, position which allowed the exchange to charge high fees in Singapore.

The Australian Parliament could raise concerns that ASX, as part of a combined ASX-SGX entity, became less efficient. The market currently assigns a 53% probability of completion to the deal.

The merger requires amendments to the Corporations Act which must be passed by Parliament.

• Foreign Acquisitions and Takeovers Act of 1975 (FATA): the treasurer may block the acquisition of shares in Australian companies by foreigners if this could be deemed contrary to Australia's "national interest". SGX plans to submit an application to the Foreign Investment Review Board (FIRB) by late January 2011 requesting the Board to approve the proposed merger. The FIRB can block the merger outright if it considers it against Australia's interests. The Australian Treasurer who has to approve the transaction can also impose conditions to grant his approval.

• Corporations Act of 2001, Part 7.4, Division 1, limits to 15% the ownership of ASX shares. The Australian Parliament will have to remove the limit to allow SGX to acquire ASX and here is where we believe the merger faces its biggest hurdle.

• Opposition leader Tony Abbot said he had "legitimate concerns" about the merger and the opposition Treasury Spokesman Joe Hockey (the Treasury also has to sign-off the deal) said he would not support the merger unless it could be shown that it was in Australia's best interest. Mr. Hockey called the ASX a "signature monopoly" used to promote Australia as a financial centre. Independent Representative Bob Katter called the deal "lunacy on a grand scale" and said he intended to block the proposal. The Green party also opposes the merger citing Singapore's poor human rights policies as well as their concerns over national interests.

Source: Equity Research Desk, www.erdesk.com

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