Failed SGX-ASX deal may harm foreign investment in Australia:Moody's

The rejection of the proposed merger with SGX will limit the Australian securities market operator’s ability to compete in an increasingly competitive global market, Moody's warned.

Treasurer Wayne Swan announced Friday that he blocked the proposed takeover of Australia’s main stock market operator on the grounds that the deal was not in the national interest.

Moody's Senior Economist, Matt Robinson noted, the Australian treasurer’s decision to reject the proposed acquisition of ASX Ltd. by Singapore Exchange Ltd. won’t just limit the Australian bourse’s ability to compete in an increasingly competitive global market; it will also do considerable harm to Australia’s reputation as a destination for foreign capital.

Moody's believes that after the proposed takeover became a contentious political issue in the weeks following last year’s unclear federal election outcome, a decision to reject the merger is not surprising. The main opposition party evoked patriotic sentiment in its hurried decision to oppose the merger when it was announced in October; the minority government relies on the support of unaligned independent members of parliament ideologically sympathetic to the retention of Australian ownership of key institutions.

However, defining what is “in the national interest” in a world of increasingly free capital flows is at best difficult, or worse, a highly subjective, bordering on xenophobic, construction. The treasurer said the deal risked a loss of control of the country’s clearing and settlement systems. Opponents argue that Australia’s ASX should maintain its focus on providing a platform for junior resource companies to obtain capital for highly uncertain prospective mining ventures, and that a board of directors based in Singapore may be more inclined to focus on mobilizing capital for manufacturing in Asia instead. Yet providing the opportunity for Australian-based companies and startups to access much larger and reputable investment capital pools in Asia offers a strong countervailing argument.

Moody's also added, the flurry of consolidation in the global securities exchange market—including Deutsche Boerse AG’s proposed takeover of the already-merged trans-Atlantic NYSE Euronext operator of the U.S. benchmark equity market—underscores how indistinct and irrelevant national boundaries are in the global capital market. It also highlights the intense competitive pressures in an increasingly congested marketplace being challenged by new technologies and scale and scope efficiencies. The Australian equity market operator risks being marginalised and ultimately dying a slow death now it has been forced to spurn its more efficient suitor.

Meanwhile, rejection of the merger on the grounds of loosely defined national interest also generates a potentially toxic degree of sovereign uncertainty regarding future M&A activity involving Australian companies. The time and energy spent on due diligence and brokering a deal with shareholders, only to be thwarted by the national government, could be sufficient to discourage foreign investors from considering future opportunities in Australia. Using Treasurer Swan’s rather eloquent wording, the only “no-brainer” in this instance is the damage done to Australia’s reputation as a destination for foreign capital.