Tokyo Exchange Plans to Merge With Osaka Securities Amid Global Takeovers

Tokyo Stock Exchange Group Inc., which runs the world’s second-largest equity market, plans to hold merger discussions with Osaka Securities Exchange Co. as takeovers sweep exchanges around the world.

The 133-year-old exchange, home to Sony Corp. and Toyota Motor Corp., is interested in acquiring its Osaka rival, which operates a derivatives trading system with Nikkei 225 Stock Average futures, President Atsushi Saito said in an interview today. Osaka Exchange president Michio Yoneda said the bourse was prepared to finalized a deal within in three months if it is to happen, a spokesman for that bourse said. The Tokyo Stock Exchange will also start preparing an initial share sale after reporting its earnings for the period ending March, Saito said.

Trading volume and the number of listed companies at the Tokyo Stock Exchange declined in 2010, while trading of derivatives expanded faster in Asia than anywhere else. The merger between Japan’s two largest bourses would be the latest in a cascade of planned exchange tie-ups totaling more than $21 billion since October, including Deutsche Boerse’s agreement last month to buy NYSE Euronext (NYX) to create the world’s largest exchange operator.

“The merger between the Tokyo and Osaka exchanges is an inevitable part of the process of globalization,” said Mitsushige Akino, who oversees about $450 million in Tokyo at Ichiyoshi Investment Management Co. “It will be tough for the Tokyo Stock Exchange to take the initiative and proceed given how they’re behind the curve.”

Derivatives Trading

“We’re looking at this very positively, but we haven’t started talks,” said Saito, a former Nomura Holdings Inc. executive. “We’ve made absolutely no decisions on timing.”

The Tokyo bourse sent a statement that no decision has been made on a merger, responding to an earlier Nikkei newspaper report. The Osaka exchange, which also operates the Jasdaq Securities Exchange, issued a statement saying there was no truth to the report. Shares in Osaka Exchange climbed as much as 12 percent before closing 6.9 higher at 460,000 yen, giving the company a market capitalization of 124.2 billion yen ($1.5 billion).

“President Yoneda said: ‘If we’re going to do it, we’re prepared to lock the deal in three months,’ but, the official comment as Osaka Securities Exchange is still there is no truth,’’ Masahiro Yada, a spokesman for the Osaka exchange said. Kyodo News earlier quoted Yoneda as saying he expected a merger agreement could be reached within three months.

‘Strong Domestic Exchange’

Derivatives trading in the Asia-Pacific region increased more in 2010 than it did in the Americas and in Europe, Africa and the Middle East, according to data compiled by the World Federation of Exchanges. Asia now accounts for the largest portion of derivatives transactions with 8.9 billion contracts traded last year, compared with 8.8 billion in the Americas.

A purchase of Osaka for the Tokyo Stock Exchange “would make them a very strong domestic exchange, combining both equities and derivatives,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York. “The derivatives component of exchanges garners a higher valuation globally since the cash equities business is seen as very competitive.”

The Tokyo Stock Exchange, which has been the center of Japan’s stock trading since 1878, faces increasing competition from growing bourses in countries such as China, as global investors increasingly raise investments in those markets in- line with the surge in economic expansion. The Tokyo exchange delayed an initial public offering in March 2009 after the biggest global financial crisis since the Great Depression.

China Competition

The Osaka exchange traded 1.4 million units of Nikkei 225 futures and 8.6 million of a smaller version of the product in February, according to the company.

China overtook Japan last year as the world’s second- largest economy behind the U.S. Japan’s economy shrank an annualized 1.3 percent in the fourth quarter, the Cabinet Office said today. China’s economy grew 9.8 percent in the quarter, according to the statistics bureau on Jan. 20.

The Nikkei 225 Stock Average has plunged about 73 percent from its peak on Dec. 29, 1989, while China’s Shanghai Composite Index has surged about 30-fold since December 1990.

Discussions between the two Japanese exchanges would follow Deutsche Boerse’s Feb. 15 agreement to buy NYSE Euronext for $9.53 billion. Singapore Exchange Ltd. (SGX) bid A$8.35 billion ($8.4 billion) in October for ASX Ltd. (ASX), which runs the Australian stock market, and London Stock Exchange Group agreed Feb. 9 to pay 1.94 billion pounds ($3.14 billion) to buy Canada’s TMX Group Inc. (X)

Race For IPOs

Average trading volume on the Tokyo Stock Exchange fell 8.2 percent to 2.12 billion shares a day in 2010, from 2.31 billion shares the year earlier, according to the exchange.

The number of initial public offerings in Japan so far this year reached 11, compared with 33 in China and 23 in Hong Kong, according to data compiled by Bloomberg.

There were just 12 foreign companies listed on the Tokyo exchange as of July last year, compared with a peak of 127 in 1991, according to the exchange.

The market value of stocks listed in Japan totals $4.12 trillion, behind only the U.S. at $16.3 trillion, according to data compiled by Bloomberg.

“There’s a change in the tide, with the Japanese realizing they have to consolidate in a situation where demand is very weak,” said Diane Lin, a Sydney-based fund manager at Pengana Capital Ltd., which has about $1 billion of assets.

Chi-X Growth

The main equity markets in Japan are facing competition from Chi-X Japan Ltd., an alternative venue that started in July. The system handled 282 billion yen in equities last month and accounted for almost 1.2 percent of trading in Nikkei 225 stocks on Tokyo exchange’s auction market, according to a notice. Parent company Chi-X Global Inc. is owned by New York-based Instinet Inc., a subsidiary of Nomura Holdings Inc. (NMR) in Tokyo.

Tokyo Stock Exchange introduced a faster trading platform in January 2010 called Arrowhead, developed by Fujitsu Ltd. and other companies. The exchange operator also modernized trading rules and the market data it compiles to suit investors eager to buy and sell shares electronically with less delay.

“Tokyo doesn’t want to be left behind,” said Simmy Grewal, a London-based analyst with Aite Group LLC in Boston. “With all the mergers going on, they want to be on the competing field. Asia is the next hunting ground.”

To contact the reporters on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net; Takako Iwatani in Tokyo at tiwatani@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net.

To contact the editors responsible for this story: Nick Gentle at ngentle2@bloomberg.net; Teo Chian Wei at cwteo@bloomberg.net.

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