TSE’s Osaka Merger Gets 90% Odds as First Deal Since 2010

Tokyo-Osaka Seen as Best Bet After Exchange Deals Fail
Atsushi Saito, president and chief executive officer of Tokyo Stock Exchange Group Inc., left, poses with Michio Yoneda, president of Osaka Securities Exchange Co., in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Tokyo Stock Exchange Group Inc.’s acquisition of Osaka Securities Exchange Co. is poised to gain regulatory approval, the first for a major bourse since $32 billion of global deals were vetoed in the past 14 months.

The takeover has a 90 percent chance of being cleared by Japan’s antitrust watchdog without any preconditions, after the government streamlined merger reviews last year, according to Koya Uemura, a lawyer in Tokyo at Anderson Mori & Tomotsune. TSE’s bid, which values Osaka at 129.6 billion yen ($1.6 billion), would create the world’s third-largest exchange based on turnover, according to data compiled by Deutsche Bank AG.

“Merger reviews are becoming looser than before,” Uemura, whose firm is ranked among Japan’s leading antitrust practices by legal publisher Chambers & Partners, said in an interview.

The Tokyo exchange accounts for about 96 percent of Japan’s equity trading, the bourse’s data show, and Osaka is the only domestic venue for futures on the Nikkei 225 Stock Average. The government wants to create what it calls a “comprehensive exchange” by 2013 to regain the country’s role as Asia’s financial hub by 2020, according to a 2010 economic planning document. Japan Fair Trade Commission began its review Jan. 4.

Regulators scuttled more than $30 billion in exchange takeovers globally since Singapore Exchange Ltd. launched a bid for Australia’s ASX Ltd. in October 2010 amid public calls to maintain domestic control of stock trading, according to data compiled by Bloomberg. The $3.9 billion bid for TMX Group Inc., operator of Canada’s main bourse, is the only other merger of public exchanges still pending.

Spokesmen for the Japanese exchanges declined to comment when contacted by Bloomberg.

Osaka’s Shares

Osaka Securities shares were unchanged at 448,000 yen yesterday, within 7 percent of the 480,000 yen TSE bid. The stock has traded within 10 percent below the offer price since the deal was announced on Nov. 22. The shares fell 0.3 percent to 446,500 yen on Osaka’s Jasdaq market today.

The bourses will hold shareholder meetings this fall or near the end of the year to vote on the merger, OSE President Michio Yoneda told reporters on May 28 in Osaka.

The Japan Fair Trade Commission announced procedural amendments last June 14 to increase transparency and speed its reviews, and to clarify merger and acquisition guidelines. The commission said a geographical market can be defined as worldwide or regional, not just Japanese, in judging whether a company would have too much power.

Review Abolished

Commissioners also abolished an informal review process before companies submitted official M&A notices. That prior consultation could take more than a year and result in lists of questions and delays, according to a report by Freshfields Bruckhaus Deringer LLP, a law firm.

The prior consultation meant deals likely to be rejected weren’t submitted for formal review. The commission has never officially blocked a merger, said Wataru Kobayashi, director of the regulator’s mergers and acquisitions division. No deals have been stopped since the changes took effect on July 1, he said.

Australia’s competition regulator took five weeks to approve Singapore Exchange’s takeover bid for Sydney-based ASX, operator of the country’s main bourse. Treasurer Wayne Swan then blocked the deal in April 2011 on national interest grounds.

The European Commission vetoed NYSE Euronext’s $9.53 billion sale to Deutsche Boerse on Feb. 1 after a review that began on June 29. The deal to create the world’s biggest bourse owner would have led to a “near-monopoly” in European exchange-traded derivatives, the regulator said. Any savings for investors from the combination would “not be substantial enough to outweigh the harm to customers caused by the merger.”

‘Nationalistic Sentiment’

The U.S. Department of Justice had previously cleared the merger as long as Deutsche Boerse sold its 31.5 percent stake in another U.S. equity market, Direct Edge Holdings LLC.

“A major distinction between the Japanese proposal and the many failed mergers is that the TSE-OSE merger is domestic,” said Yap Lian Seng, a partner at Singapore-based law firm Stamford Law, who advised ASX on Singapore Exchange’s failed bid. “Many of the other mergers were cross-border transactions involving the main, or national, stock exchange of the countries. Opponents to such transactions could easily play up nationalistic sentiments.”

While the TSE’s share of domestic stock trading value is about 96 percent, it was 6.3 percent of the global total in 2011, according Deutsche Bank’s May 24 report. OSE’s global share was 0.3 percent, making the combined trading value the third-highest after NYSE Euronext and Nasdaq OMX. For derivatives transactions, TSE and OSE combined made up 0.9 percent of global trading value, according to the report.

‘Narrow’ View

“There were some opinions that the commission’s attitude toward a global market was too narrow,” said Akinori Uesugi, a senior consultant at law firm Freshfields, who was a previous secretary general of the regulator. With the rules clarified, more companies would “try to engage in bigger or more global mergers,” he said.

An agreement between Japan’s Nippon Steel Corp. and Sumitomo Metal Industries Ltd. to create the world’s second-biggest steelmaker was approved by the commission less than a year after their merger talks began.

“Despite the large-scale deal, it was approved in a short time and almost without any preconditions,” said Anderson Mori & Tomotsune’s Uemura.

Emerging Competition

In 2000, Japan had 12 companies among the world’s 30-largest firms by sales, according to data compiled by Bloomberg. The country had three as of June 1 this year, compared with six from China, South Korea, Russia and Brazil in the top 30. In 2000, no emerging market companies were in the top 70.

“Mergers are rejected when a company’s market share rises, leading to higher prices,” Uemura said. “Given the deteriorating standing of TSE in the world, and with money flowing out overseas, it’s hard to think the merged bourse would increase fees or lower its quality of services.”

Japan’s benchmark Nikkei 225 Stock Average slumped 17 percent last year after the March 2011 earthquake, tsunami and nuclear disaster, and as a flight to safety from Europe’s debt crisis drove the yen to a post-World War II high, reducing repatriated corporate profits. The index is up 0.9 percent this year through June 6, compared with a 4.6 percent gain by the Standard & Poor’s 500 Index.

Initial public offerings in Japan increased to 36 last year from 22 in 2010, according to data compiled by Bloomberg. Total proceeds of less than $2 billion accounted for 1 percent of the global total in 2011. That compares with $23.9 billion raised in Hong Kong, and $44.2 billion in China. Twenty-two listing announcements have been made in Japan this year.

“There’s a lot of attention on this merger deal from those who study antimonopoly laws,” said Funada Masayuki, a law professor at Japan’s Rikkyo University. “This is a special case involving exchanges, and it’s hard to bring up precedents. The regulator will be faced with making a new kind of assessment.”

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