Japan Exchange Clears Last Hurdle as Shareholders OK Deal

Tokyo Stock Exchange and the Osaka Securities Exchange
A combination photograph shows the Tokyo Stock Exchange (TSE) in Tokyo, left, and the Osaka Securities Exchange (OSE) in Osaka. Photographers: Tomohiro Ohsumi (TSE) and Tetsuya Yamada (OSE)/Bloomberg

Shareholders of Osaka Securities Exchange Co. and Tokyo Stock Exchange Group Inc. approved a $1.6 billion merger of Japan’s biggest bourses in a bid to reinvigorate the country’s securities markets.

Owners of the companies approved the transaction at extraordinary meetings in Tokyo and Osaka. Tokyo Stock Exchange bought 66.7 percent of the smaller exchange after a tender offer that ended in August, making today’s votes largely procedural. Shares of the Osaka exchange jumped as much as 6.4 percent today, the most since the deal was announced last November.

The merger is the first step by Japan’s government to create a national exchange trading stocks, commodities and other securities to cope with equity volumes that have shrunk by more than 3 percent since 2005 as trading shifts to greater China. Exchanges globally are seeking to merge as alternative trading venues gain market share and the demand for faster and cheaper transactions pushes costs up and margins down.

“They will need to compete with the rest of Asia,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages about $120 billion. “They can do it better as a joint force rather than individually.”

The 134-year-old Tokyo exchange, home to Toyota Motor Corp. and Canon Inc., hosted the biggest non-U.S. equity market by value as of June 30, according to the World Federation of Exchanges. Only the New York Stock Exchange and the Nasdaq market are larger, the data show.

Rice Futures

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 where futures on the Nikkei 225 Stock Average change hands.

About 7 billion yen ($86 million) a year could be saved through integrating information technology systems, the Tokyo and Osaka bourses said in their merger document last November. TSE president Atsushi Saito had his pay cut in August after the company was reprimanded by regulators for computer errors that disrupted trading twice this year.

Japan’s reputation as a financial hub has been hurt by the Nikkei 225’s 77 percent slide since 1989, an economy that is threatening to fall into its third technical recession in four years, and accounting scandals at companies including Olympus Corp.

Shrinking Market

The value of shares listed in Japan has shrunk 10 percent since the start of 2005, according to data compiled by Bloomberg. Mainland China’s equity market grew sevenfold in the period, while Hong Kong’s market capitalization increased by 166 percent to become the world’s No. 4 market, the data show.

“The merger by itself won’t help boost the presence of Japan’s financial market,” said Tatsushi Maeno, head of investment at PineBridge Investments Japan Co., which manages about $11 billion globally. “Investors are looking for economic growth and Japan has lagged behind the rest of Asia.”

Average daily trading volume on the first section of the Tokyo Stock exchange has fallen 11 percent to 2 billion shares this year from 2011, and is down more than 3 percent since 2005, according to data compiled by Bloomberg.

The number of new listings on Japan’s exchanges has also tumbled. So far this year, only 53 firms have announced plans to list, compared with 201 during the same period in 2006, when the Nikkei 225 completed a four-year rally, data compiled by bloomberg shows. In mainland China, some 265 companies have announced plans to list this year, according to the data.

‘Top Priority’

“One of our top priorities is to encourage small and mid-sized companies to list on our exchanges,” TSE president Saito said today at a briefing after the shareholders’ meetings. “We need to do what we can to stimulate the economy.”

The deal in Japan comes as Hong Kong Exchanges & Clearing Ltd., operator of Asia’s second-largest equity market by value, awaits regulatory approval of its takeover of the London Metal Exchange. TMX Group Ltd., owner of Canada’s main stock exchange, was acquired in September by Maple Group Acquisition Corp. as part of a takeover that combined it with a clearing house and Alpha Group, one of its competitors.

Regulators and politicians in Brussels, Washington and Canberra have helped scuttle at least another $32 billion of exchange takeovers since the start of last year, according to data compiled by Bloomberg.

The TSE won control of Osaka in a tender offer that closed Aug. 22, valuing the smaller exchange at 129.6 billion yen ($1.6 billion). The deal will be completed via a share swap that values TSE at 1.7 times Osaka.

‘Money maker’

The company will retain Osaka’s listing on the Jasdaq Exchange, according to the bid document. Shares of the merged exchange are also scheduled to start trading on the first section of the Tokyo Stock Exchange on Jan. 4, Saito said on Oct. 29.

“I feel a connection with the company,” said Osaka shareholder Katsuji Fujikura, an 82-year-old native of the city who said he voted for the merger and plans to hold on to his stake. “I think it’s a good idea to become more globally competitive and I’m keeping the stock because I hope the combination with Tokyo will be a money maker.”

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