Eighteen months can feel like forever in the business world. Just ask the operators of the Toronto Stock Exchange. A year and a half ago, the TMX Group seemed set to merge with the London Stock Exchange. The deal would have created a global powerhouse in the increasingly international world of public stock listings and trades. But it wasn’t to be. Instead, a consortium of Canadian financial players—big banks and pension funds mostly—emerged to capture TMX for itself. On July 31, the Maple Group, after jumping through an Olympian series of regulatory hoops, finally closed its takeover of TMX—along with its largest domestic rival, Alpha, and the previously not-for-profit Canadian Depository for Securities.
Ninety-one per cent of TMX shareholders agreed to tender their shares to Maple for $50 apiece before the end-of-month deadline. The price represented a rich premium on both the pre-merger talk price and the LSE’s initial bid 18 months ago. The deal was unanimously recommended by the TMX board, which had initially backed the London bid. (TMX and London called off merger plans in June 2011 when it became clear shareholders wouldn’t support the deal.) The takeover leaves the new TMX with a stranglehold on Canadian trading. The post-merger company controls some 85% of the equities traffic in this country, according to Reuters. But it also positions the company to better compete internationally. At least that’s the plan.
TMX is reported to have already entered talks to buy Direct Edge, the fourth-largest exchange in the U.S., and its international-minded CEO, Thomas Kloet, is staying on. But whether Kloet can navigate the sometimes jingoistic world of international exchange acquisitions remains to be seen. Last year, the Australian government blocked the Singapore Exchange from taking over Australia’s main stock market on national-interest grounds. And not everyone believes TMX will have any more luck than Singapore—or the Londoners for that matter—did playing for big stakes at the international table.
“There a re competing exchanges out there, and we are seeing consolidation,” says Laurence Booth, a professor of finance at the University of Toronto’s Rotman School of Management. “But the fact is, a lot of this does come up against national urges to protect their best stock exchanges.”
Still, Booth doesn’t believe TMX can afford to stand still. “If you’re standing still, you’re going to get picked off. The TMX Group has the Toronto market sewn up now, but the Toronto market is increasingly coming under competition from the U.S,” he says.
Luckily, outright takeovers aren’t the only or even the best way to expand. Jon Aikman, a Rotman lecturer and consultant, believes TMX might be best served pursuing strategic partnerships and smaller deals. In any event, he believes management should be extremely wary of venturing south of the border. “If you look at going into the United States, you’re looking at trying to comply with a huge number of proscriptive regulations,” he says. “You have 2,300 pages of Dodd-Frank that are going to impact what you’re trying to achieve there.”
So what will the deal mean for investors here? There’s no question the new TMX will have a dominant market position. Aikman calls it “in effect, a government-regulated monopoly.” But in order to acquire Alpha and the CDS, along with TMX, Maple did have to agree to a host of conditions from provincial regulators worried about competitive issues, geographic concerns and the inherent conflict of having some of the country’s largest trading pools and institutional investors controlling so much of the exchange market. New rules on fee structures, fair listing and board composition should keep TMX from taking undue advantage of its market position. The Competition Bureau, which announced it would not challenge the merger in July, still has a year after the deal closes to bring a case before a tribunal if it so chooses. The Investment Industry Association of Canada, too, intends to keep close tabs on the new entity.
As for retail investors, they aren’t likely to notice much difference, at least in the short term, Booth says. Alpha is mostly used by major institutional investors to execute large-scale, computerized trades. And many big Canadian stocks are already cross-listed on U.S. exchanges. So while the new TMX will control a massive chunk of the Canadian market, it won’t be free from competition for Canadian business. In any case, the barriers to entry into the exchange biz are even lower today than they were when Alpha launched. “It’s not like the old days, when you had to set up a floor and have a bunch of traders,” Booth says. “This is basically computer software.”