Political odds stacked against ASX and SGX merger

FORGET the solemn Canberra talk of the need to follow FIRB processes in weighing the proposed Singapore stock exchange-ASX deal.

This will come down to a political decision -- a very fraught one. And in its current form, the proposal has no chance of receiving approval.

Instead, the Gillard government will want to loudly proclaim it is protecting the national interest on such a sensitive issue. The main question is what changes the government will demand and whether Singapore will be willing to amend the agreement sufficiently.

But as the deal is now formulated -- as a clear takeover by the Singapore exchange and where Australia has only four of 15 directors -- the politics are overwhelmingly stacked against it.

At the very least, the government will want a deal that looks far more like a merger than a complete takeover. Presumably backed by advice from the Foreign Investment Review Board, Wayne Swan will demand more equal board representation as well a range of other commitments.

That need for "give" is certainly understood by the ASX and its advisers at UBS, even if they won't want to acknowledge it. Just how much give is necessary or available is less certain.

The main hurdle in Canberra was never going to be the predictable criticism of the authoritarian Singapore government by the Greens or the outrage of independents such as Bob Katter. It is the need to get support from both Labor and the opposition to render those minor players irrelevant in the passage of legislation.

But doubts within both major parties about the risks and rewards of the deal won't be easily resolved. Against the background of political populism and financial jitters -- just look at the debate over interest rates -- any suggestion of loss of national control creates problems.

Even in the market, the particulars of this deal have as many critics as adherents. So to the extent that Canberra does actually listen to financial players, it won't necessarily find reassurance about the merits of such a tie-up.

For the ASX, however, the priority was getting the highest financial equation on the table first and worrying about the political equation second. In terms of money, this approach worked well. The $8.4 billion offer from Singapore Exchange was at a 37 per cent premium to the last trade share price of ASX on October 22. The political equation is not so neatly calculated.

Certainly Canberra is going to reject any notion that a good deal for ASX shareholders implies a good deal for the country. It will only be more suspicious that self-interest, rather than national interest, is driving the deal. But the basic ASX argument is to suggest this will be win-win.

It maintains that the crucial regulatory infrastructure, including licensing, clearing and settlement and listings rules, will continue to be controlled in Australia so there will be no change to the standards and integrity of the market. In addition, the ASX maintains that the only alternative to linking up with another exchange is an Australian stock exchange that becomes progressively less significant in global terms and less able to provide necessary liquidity and capital as other exchanges consolidate. It points to the fate of a shrinking New Zealand stock exchange after it refused to link up with Australia. And it says the Singapore deal gives Australian companies and investors much better exposure and access to Asia, the world's fastest-growing region.

It also suggests that the decision of the government to allow competition next year in the form of Chi-X Australia means that the ASX had no choice but to look internationally.

Unfortunately, this was just at the time when that same prospect of domestic competition had driven down the ASX's own relative market cap and restricted the ability to do a merger of equals.

Outgoing chief executive Robert Elstone expressed those sentiments in announcing the deal on October 25. "Policies of governments to fragment their domestic markets to open them up to competition means the importance of scale and technology, product offering, tapping into the largest possible savings pool -- all of these parameters take on far more significance," he declared.

"I think the choice for the government will be a stark one -- is the national interest best served by boxing the domestic exchange into its existing strong but confined to Australia franchise or should it allow its domestic exchange to truly internationalise?"

For the moment, that stark choice is being deliberately, if temporarily, downplayed publicly by the government, the opposition and the ASX following the initial excitement around the announcement of the deal.

The ASX is waiting to rev up its own arguments until the Singapore exchange formally lodges its FIRB application, now expected in the first week of next month.

The ASX has appointed David Gazard, who was an adviser to former treasurer Peter Costello and unsuccessful Liberal candidate for Eden Monaro, to work on the Liberals and National Party. It has appointed Cameron Milner, former Queensland state Labor party secretary, to work on the Labor side of politics.

But the lobbying will remain relatively light-handed while the FIRB process continues, probably for several months. The ASX wants to be seen to follow the rules. It also knows that to do otherwise would be counterproductive anyway, given the mood in Canberra.

The government is likewise attempting to contain the issue within FIRB and to chloroform a potential confrontation into next year before considering what sort of conditions and changes might be acceptable.

After all, it has plenty of other more urgent crises to deal with beforehand. Labor would also have to be convinced any revised deal is worth arguing for in terms of long-term benefits to the Australian economy -- and that it will not open up its flank to the Liberals.

The opposition has likewise pulled back on its virulent criticism, now insisting that it needs to see the implications of "potentially ceding control over an institution which is really at the heart of our financial system".

In reality, the Liberals want the onus of the decision to be on the government and don't want to be accused of blocking a deal before it is properly considered. But the opposition will be ready to criticise the deal as soon as it perceives political advantage.

And so far the ASX is yet to sell a persuasive political case. It was prevented from informally prepping the politicians ahead of time because it, of all companies, had to follow procedure on continuous disclosure. Even so, it wasn't ready to go with a strong national interest argument immediately, leaving the territory open for a few days of xenophobic attack.

Some political insiders say this sort of political furore was inevitable no matter what. The rationale is that this is a long game that will play out over many months so the first few days of hysteria didn't matter in the context of calmer consideration.

This all sounds logical on one level. But logic in Canberra is in short supply and the main political poker game will only start once the FIRB advice officially gets into Swan's hands next year. Certainly if FIRB advised against the proposal, it would be all over. But the predisposition in favour of foreign investments means that is almost certainly not going to happen.

More likely will be an outcome where FIRB suggests conditions while the government hardens those up and adds to them. This would avoid the political embarrassment of outright rejection undercutting the government's credibility while turning the focus on Singapore's willingness to compromise. It's the ultimate political bet on the market.

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Who do you think you are that you want to merger with ASX?...
Unless SGX belong to American that should not be a problem.