Why Maples’s bid is best fate for [Canadian] TMX – by David Olive (Toronto Star – May 28, 2011)

David Olive is a business columnist with the Toronto Star, which has the largest circulation in Canada. The paper has an enormous impact on Canada’s federal and provincial politics as well as shaping public opinion. dolive@thestar.ca

TMX accounts for nearly six of ten publicly traded mining firms worldwide. Last year,
they raised $17.8 billion in equity capital, about 60 per cent of the world mining total.
Close to 200 foreign resource firms have their principal listings on TMX exchanges,
though many lack Canadian assets. (David Olive – Toronto Star Business Columnist)

By 150-year-old tradition, TMX is in the business of nurturing its staggering 1,531 listed mining firms into global giants like Barrick Gold Corp. and Teck Resources Ltd.

If it succeeds, the rival bid for TMX Group Inc., owner of the Toronto Stock Exchange, will make history far beyond derailing a takeover offer for TMX made by London Stock Exchange PLC in February, supported by Royal Bank of Canada and Bank of Montreal.

The nine-member Maple Group Acquisition Corp., a consortium of four Canadian banks and five pension funds, seeks to further strengthen a TMX already regarded by investors worldwide as the “go-to” exchange for trading in resource firms, notably mining companies.

Current conventional wisdom has it that an urge to merge will result in a handful of global mega-exchanges.

Except that four of Canada’s Big Six banks immediately objected to the LSE-TMX combo. Added last year to Forbes’ ranking of the world’s 10 most influential financial centres, Toronto “does not depend on selling out or waiting for others to ‘save’ us,” said the objecting banks in an open letter.

In April, Canberra rejected an $8-billion proposed takeover of Australia’s principal stock exchange by that of Singapore. Citing a likely brain drain, Australian treasurer Wayne Swan nixed a deal he claimed would “risk seeing jobs and capital move to Singapore.”

That same month, the Taiwan Stock Exchange asserted its preference for internal growth, and for alliances to takeovers.

Mega-exchange mania has so far yielded cumbersome, debt-laden bureaucracies that have generated meagre investor returns. Surrendering our capital markets to a fad doesn’t seem an ideal economic strategy. TMX is a nation-building enterprise older than Confederation and poised for greater things than becoming a backwater.

Tom Kloet, the American recruited to run TMX only to try delivering it into foreign hands, claims an LSE deal will create a “globally competitive yet domestically focused capital marketplace.”

Which, as it happens, TMX already is.

TMX accounts for nearly six of ten publicly traded mining firms worldwide. Last year, they raised $17.8 billion in equity capital, about 60 per cent of the world mining total. Close to 200 foreign resource firms have their principal listings on TMX exchanges, though many lack Canadian assets.

By 150-year-old tradition, TMX is in the business of nurturing its staggering 1,531 listed mining firms into global giants like Barrick Gold Corp. and Teck Resources Ltd.

By contrast, mega-exchanges “won’t be as strong an advocate for the smaller companies in each country” as local exchanges have been, David Weild IV, former vice-chairman of Nasdaq OMX Group, world’s second-largest exchange, told the Wall Street Journal in April.

Which is only common sense. The revenue stream in fees from having a humongous Sun Life Financial Inc. listed on your exchange is equal to scores of Red Rocket Resources listings. Why would you cater to those minnows? Especially when you’re an LSE, whose culture is utterly foreign to doing so?

Some 10 per cent of those TMX-listed mining companies are international enterprises, owning more than 5,000 properties outside Canada. For the recent GTA graduate in geology, finance or engineering, Toronto is the gateway to the most challenging mining and energy projects worldwide.

And economic nationalism aside, as many as 20,000 people in the GTA already derive their living directly or indirectly from TMX.

Maple is trumping LSE’s bid by 15 per cent, in a $3.6-billion cash and share deal, compared with LSE’s all-share $3-billion bid. Among dealmakers, a superior bid like Maple’s would be enough said. But it’s how Maple justifies its premium price that makes its proposal in the national interest.

The future of exchanges isn’t mega-trading arenas, but “vertically integrated” ones. That is, holistic exchanges that can boast first-in-class prowess in stock trading, derivatives, and clearing and settlement of trades, taking a fee at every stage.

A deficient LSE covets both TMX’s Montreal-based derivatives and its TMX Venture Exchange. What TMX, like most exchanges, lacks is its own clearing and settlement business. That’s an asset that makes Deutsche Boerse the world’s second-most valuable exchange in market cap.

The Big Six banks and TMX are partners in CDS Inc., Canada’s stock-clearing operation. CDS would be folded into the new TMX by Maple. So would Alpha Group, a rival Big Six-owned exchange that has been draining market share from TMX.

For the rest of this column, please go to the Toronto Star website: http://www.thestar.com/columnists/article/998636–olive-a-much-better-fate-for-tmx

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