ASX Deal Doomed by Giving Up Control to Singapore Exchange, Investors Say

ASX Ltd. (ASX), the owner of Australia’s main bourse whose complete takeover by Singapore Exchange Ltd. (SGX) was rejected by the government, may have succeeded with a gradual approach, investors said.

Australian Treasurer Wayne Swan blocked Singapore Exchange’s bid for the operator of the Sydney-based bourse April 8. The deal was not in the nation’s interest and would have left the Australian company as a junior partner, Swan said in Canberra, the Australian capital. The companies terminated their agreement, worth A$8.35 billion ($8.8 billion) when it was unveiled on October 25, after the decision was announced.

ASX Chief Executive Officer Robert Elstone’s acceptance of an offer that gave control to a foreign buyer made the takeover too easy for Australian lawmakers to oppose, said Thomas Murphy, managing partner at Family Office Research & Management Ltd. in Sydney, a private wealth-management firm that holds ASX shares. Swan called the rejection a “no brainer” in his press conference.

“There was clearly naivete about the political environment,” Murphy said. “If the deal was approached more delicately and diplomatically, they could have done this over a few years in a couple of stages. To come in with majority control in one hit was a strategic mistake.” Family Office’s holding is less than 0.1 percent of ASX, according to Murphy.

Photographer: Luis Enrique Ascui/Bloomberg

An ASX stock board in Melbourne. Close

An ASX stock board in Melbourne.

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Photographer: Luis Enrique Ascui/Bloomberg

An ASX stock board in Melbourne.

Immediate Opposition

Singapore Exchange, led by Chief Executive Officer Magnus Bocker, 49, offered to buy ASX on Oct. 25 in a cash and share deal the companies said was necessary to stave off competition among exchanges to attract international capital. Elstone said the deal was in both countries’ interests and that the companies were confident of approval.

Singapore Exchange’s offer of A$22 and 3.473 of its own shares for each ASX share valued the Australian bourse at 19.5 times earnings before interest and taxes, according to data compiled by Bloomberg. That’s almost twice as much as the 10.4 times London Stock Exchange Group Plc (LSE) said on Feb. 9 it would pay for Canada’s TMX Group Inc. (X), the data show.

The sale ran into opposition from Australian lawmakers whom Prime Minister Julia Gillard’s minority government needed to pass legislation allowing the deal in parliament. Bob Katter, an independent in Parliament, said a revised offer on Feb. 15 that would have given Australians more board seats was “like putting a pig in a dress.”

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Stock prices are displayed on a stock board inside the Australia Securities Exchange building in Sydney. Close

Stock prices are displayed on a stock board inside the Australia Securities Exchange building in Sydney.

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Photographer: Ian Waldie/Bloomberg

Stock prices are displayed on a stock board inside the Australia Securities Exchange building in Sydney.

Elstone’s Career

Opposition from lawmakers “was a substantial hurdle and was underestimated in terms of the degree of difficulty in achieving approval,” said Melbourne-based Tim Schroeders, of Pengana Capital Ltd., which manages about $1 billion. “It’s a shame for Elstone, someone who’s been held in very high esteem by investors, to have this as a feature of his tenure. It’s not reflective of the good job he’s done overall.”

ASX has said that it is open to further tie-ups and that it believes in the need for participation in regional as well as global exchange consolidation.

A search for a replacement for ASX’s Elstone, whose term expires July 11, is underway, the company said in a statement. He’s been managing director and CEO of ASX since July 2006, when the bourse completed its acquisition of SFE Corp., Australia’s biggest futures exchange, where Elstone held the same positions.

The appointment of Elstone, who also had to resign as a non-executive director of National Australia Bank Ltd. to take up the ASX position, was aimed at appeasing SFE shareholders who had threatened to block the merger proposal. Elstone, 57, who announced in September that he would not seek reappointment, was hired on an initial three-year contract that could be extended to this year at the discretion of the board.

Track Record

Elstone oversaw an increase in SFE’s share price from A$3.53 when he took over as CEO on May 3, 2002 to a high of A$17.95 on March 27, 2006, the day ASX’s takeover was officially announced.

“Elstone has had a good track record of creating value for shareholders both at SFE and ASX,” said Simon Bonouvrie, who helps manage about $1.8 billion at Platypus Asset Management Pty. in Sydney and doesn’t own ASX shares.

At the close of Sydney trading on April 8, shares of ASX were worth 4.4 percent less than they were on July 25, 2006, the day Elstone was appointed in place of departing ASX CEO Tony D’Aloisio, according to data compiled by Bloomberg. The S&P/ASX 200 Index fell 1 percent in the same period.

Singapore Exchange offered to buy ASX for 37 percent more than ASX shares’ closing price on the last trading day before the announcement. The stock rallied 19 percent to A$41.75 the day the bid was unveiled. It slipped 4.4 percent to A$33.33 to April 8 from April 5, when Swan said Australia’s Foreign Investment Review Board had advised against it. Singapore Exchange’s stock closed at S$8.38 on April 8, 12 percent below its level before the bid. It has risen 4.6 percent since the close on April 4.

Stay Competitive

Stock exchanges around the world are merging to stay competitive. More than $20 billion in acquisitions have been announced in the past five months as companies in North America, Europe and Asia try to cut costs and boost revenue from trading in stocks, options and futures. Frankfurt-based Deutsche Boerse AG (DB1) and NYSE Euronext (NYX) agreed to merge, while LSE said it would buy TMX, owner of the Toronto Stock Exchange.

ASX spokesman Matthew Gibbs said the company had no comment on Australia’s political environment. The failure of the bid wasn’t “disastrous,” said Singapore Exchange co-President Muthukrishnan Ramaswami in Hong Kong on April 8.

‘Softer Approach’

“I don’t think ASX can be lambasted for trying to grow and improve their business outside Australia,” said Pengana’s Schroeders. “But in retrospect, a softer approach may have been more applicable, where you’d have a minority interest to begin with which doesn’t raise a red flag, more of a strategic tie-up than a takeover.”

The deal, unanimously recommended by the boards when they announced it, was an attempt to compete with rival exchanges in Tokyo and Hong Kong, the Chinese city where a record $58 billion was raised in equity offerings last year, according to data compiled by Bloomberg. Bocker, a former president of Nasdaq OMX Group Inc. (NDAQ), was to become CEO of the combined company.

“Given the amount of global consolidation that’s been occurring, you’d think there’d have been a fair chance you’d be able to get it over the line,” said Chris Hall, who helps manage $4 billion at Argo Investment Ltd. in Adelaide, Australia, which owns ASX shares. “It would have been impossible to have seen the kind of political opposition that we’ve seen coming.”

Swan did not rule out future approaches for ASX, saying he is “open to the right deal for Australia if it comes along.”

Cost Savings

Before Elstone joined SFE in 2000, the graduate of University of London and Stanford Graduate School of Business, served as chief financial officer of Air New Zealand Ltd., from 1991 to 1994, and from 1995 as CFO of building-materials producer Pioneer International Ltd., according to Bloomberg Businessweek.

At the time the takeover was announced, the companies said they expected that the combination would result in annual cost savings of $30 million and create opportunities for new products and services. They expected to be able to implement the agreement during the second quarter of 2011.

“This was a naive venture that was doomed from the start because of nationalist sentiment,” said Phil Lewis, head of economics at the faculty of business and government at the University of Canberra. “What a waste of money.”

To contact the reporters on this story: Gemma Daley at gdaley@bloomberg.net Shani Raja in Sydney at sraja4@bloomberg.net;

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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