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TSE Wins Bid for Osaka as Japan Plots Market Renaissance

TSE’s Tender for Osaka Bourse Succeeds as Pledges Exceed Maximum
The Tokyo Stock Exchange (TSE) in Tokyo, left, and the Osaka Securities Exchange (OSE) in Osaka, Japan. Photographers: Tomohiro Ohsumi (TSE) and Tetsuya Yamada (OSE) /Bloomberg

Tokyo Stock Exchange Group Inc. won control of its Osaka rival, succeeding where more than $30 billion of other exchange merger bids have failed, as the country seeks to reassert its role as a financial hub for Asia.

The operator of the world’s third-largest cash equity market by value said in a statement that it received offers to sell 80 percent of Osaka Securities Exchange Co.’s shares, more than the 67 percent it sought in a tender offer that closed yesterday. The offer price of 480,000 yen per share represents a premium of 9.7 percent to Osaka bourse’s closing price today of 437,500 yen. The bid values the smaller company at 129.6 billion yen ($1.65 billion).

Effective control of Osaka Securities means the Tokyo bourse won’t need the support of any other shareholders to approve the deal. While regulators have blocked more than $30 billion in other mergers since 2010, the marriage of Japan’s two largest equity-trading venues is part of a national plan to consolidate the country’s fragmented exchange industry amid competition from China and other emerging markets.

“The government wanted to make the exchange into one and strengthen it to become a global player,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo, which oversees about $6.7 billion. “The exchanges shared the sense of crisis. Japan’s position is declining, especially in Asia. It’s pointless to be fighting over market share when the nation’s market value and trading volume are deteriorating.”

Equity Slump

Japan’s reputation as a financial hub has been battered as more than two decades of equity losses and economic stagnation have combined with corporate governance scandals. Poor management at Tokyo Electric Power Co. was blamed in part for last year’s nuclear disaster, while senior board members of Olympus Corp. were found to have hidden losses through inflated fees after they fired whistle-blowing president Michael Woodford in October.

The Nikkei 225 Stock Average has lost more than 75 percent of its value since peaking in 1989. China surpassed Japan as the world’s No. 2 economy in 2010, and the combined value of equity markets in the mainland cities of Shanghai and Shenzhen has at times exceeded that of Japan’s.

In 2010, Japan’s government said it wanted to create a “comprehensive” exchange that combined the country’s nine bourses into a single entity handling stocks, commodities and other securities. The country’s Financial Services Agency was involved in discussions between TSE and Osaka before the deal was announced, two people with direct knowledge of the talks said in March.

More Attractive

“Japan’s financial industry has taken its first step in matching up to Europe, North America and Asia,” said Tatsushi Maeno, head of investment at PineBridge Investments Japan Co. in Tokyo. “Unless Japan’s economy strengthens, the company won’t be too useful as an exchange. Japanese companies need to become more attractive as well.”

The 133-year-old Tokyo exchange, home to Toyota Motor Corp. and Canon Inc., accounted for 88 percent of Japan’s cash equity trading in the first seven months of this year, according to data compiled by Bloomberg. Osaka, which was established in 1878 and has its roots in a futures exchange for rice during Japan’s Edo period, is the only domestic venue for futures on the Nikkei 225 Stock Average.

“The days when we were competing with TSE in ‘‘a small glass’’ are over,” Osaka President Michio Yoneda said in a statement. “The world exchange industry got into the age of global market competition, and each market is competing for investors cross borders. We throw off the cloak of OSE or TSE and create the all-Japan exchange.”

‘Japan Exchange’

Tokyo is assured of being able to move the merger process to the next step, which is a share swap that values the Tokyo venue at about 1.7 times its smaller partner, said Jonathan Foster, Singapore-based director of Global Special Situations at Religare Capital Markets Ltd. An extraordinary shareholders meeting to approve the deal is expected to take place this fall, according to the statement from the TSE. The agreement to create what is tentatively called the Japan Exchange Group will close in January, Tokyo said.

“This is a big step towards the creation of Japan Exchange Group,” TSE President Atsushi Saito said in today’s statement. “In order to become Asia’s No. 1 bourse, it’s important that the Japan Exchange Group becomes the engine of Japan’s economy and become Asia’s financial hub by bringing in global investments.”

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