Asian exchange tie-up makes sense but at bad price
Magnus is the Latin for big. And Magnus Bocker, the new CEO of the Singapore Exchange (SGX), is certainly thinking big. Whether his $8.3 billion bid for Sydney-based ASX is good for his own shareholders is another matter. The move has some strategic logic. But the hard synergies are small and the 37 percent premium seems too generous.
A Singapore and Australia tie-up makes some sense for both parties. Asia lacks a big non-Chinese trading platform. Both countries face outside pressure. Singapore has been losing China-related listing businesses to Hong Kong. Australia struggles to benefit from the Asia boom as it is culturally and physically remote. Together they offer investors access to 2,700 companies from 20-plus countries, and the world’s second-largest grouping of resources stocks.
But few synergies can be extracted from the deal. The partners are not merging their markets, so the combined entity
still needs to operate two order books and matching systems. The fact that they operate a common technology platform eases integration, but it may also mean there is less to gain from one single platform. The cost savings will be perhaps only $30 million a year. Capitalise that and the net present value is maybe $300 million — a tiny fraction of the $2.2 billion premium the SGX is offering.
True, the deal may still be earnings enhancing for SGX. That’s largely because SGX, which is in a net cash position,
plans to add $3.8 billion in debt to finance the deal. It is also exploiting its premium valuation: the Singapore exchange is valued at 28 times 2011 earnings, versus the multiple of 23 times it is offering for its Australian rival, according to
Deutsche Bank. But extra leverage will make future earnings more vulnerable; and SGX is diluting some of its growth potential by merging with slower-growing ASX.
Singapore probably had to offer a premium to get the deal done, not least because it needs ASX enthusiastically onside to persuade Australia to part with a national treasure. Nevertheless, this looks like a value destructive move. Magnus
will be hoping it’s not a big one.