Editorial: TMX-LSE merger proposal shakes up Canadians

The markets have been abuzz since yesterday’s jolting announcement that the London Stock Exchange and the TMX Group – operator of the Toronto Stock Exchange and the TSX Venture Exchange – plan to merge in a deal that would create an exchange group that would rival only the NYSE Euronext in size.

With ownership split about 55-45 between existing LSE and TMX shareholders, the combined exchange group would have a market capitalization of just under $6 billion, and boast stock exchanges and securities markets in several countries. The combined assets would include the London Stock Exchange, AIM, Borsa Italiana, Toronto Stock Exchange, TSX Venture Exchange and Montreal Exchange.

With “co-headquarters” in London and Toronto, LSE CEO Xavier Rolet would become CEO of the combined company, while TMX CEO Thomas Kloet would serve as president and Wayne Fox would be non-executive chairman. The 15 directors would come almost equally from both sides.

The combined company would be number one in total number of listings, hosting over 6,700 companies with an aggregate market capitalization of $5.8 trillion. It would have global leadership in mining, energy and other natural resource-related industries, as well as clean-technology companies.

Rolet appeared with Kloet at a press conference in Toronto this morning to start selling the deal to shareholders and a skeptical Canadian public. The two argued that the merged exchanges would provide deeper and more flexible pools of capital for businesses, and provide a wider range of financial products and services to customers.

At the same time, both companies are already so lean and cutting-edge in terms of technology, it’s hard to see what kind of money-saving synergies can be squeezed out of the merged company. Indeed, the pair only identifies about $56 million in potential annual savings after two years for a company that would have perhaps $1.6 billion in annual revenue.

But Rolet and Kloet failed to mention that there is a huge clash in ethos between the boy-scout Canadian and the predator British brokerage industries. Bringing these two groups together is akin to merging the walleye and shark tanks at the London Sea Life aquarium.

The merger proposal has sparked a fresh round of debate in Canada over private versus public interests.

On the one side, the boards of both companies are unanimous in their support of the deal. And, with shares of publicly traded LSE and TMX shares up on the announcement, shareholders are likely to give their strong approval. So, the argument in favour of regulators approving the merger is pretty simple: let owners decide what to do with their own businesses.

On the other side, we now live in a time when national stock exchanges are reservoirs of national pride and political influence, much as national airlines were up until the 1980s, when many national governments decided there were better and cheaper ways to project national identity.

Canada’s Finance Minister Jim Flaherty signaled that federal approval of the merger is in the hands of Industry Minister Tony Clement, who was recently widely praised in Canada for putting the kibosh on the proposed takeover by Australia’s BHP Billiton of Potash Corp. of Saskatchewan on grounds of national strategic interest, along with an unstated concern the government would lose key seats in the Prairie province.

Other Canadian regulators that need to sign off on it are the Ontario Securities Commission and Quebec’s securities commission, the Autorité des marchés financiers du Quebec. It’s the latter, along with the wider Quebec government, that may prove to be the toughest sells on the deal, as the province already lost its stock exchange in Montreal after its merger with the TSX, and the provincial government has steadfastly worked to prevent the establishment of a national regulator because it would weaken Quebec sovereignty.

One self-identified “curmudgeon” writes to remind us that, in the global mining industry, some of the most bizarre and suspect deals used to come out of London and its fringe “resource” brokerage houses and promoters, who were big into shady deals and lawsuits against resource companies using layers of tax-dodging shells as fronts.

The Eskay Creek overstaking lawsuit was financed in London, and then there were the Corona blackbirds and their convoluted self-serving deals facilitated through London. And more recently, there was the London-made deal to “acquire” copper assets in the Democratic Republic of the Congo once held by First Quantum Minerals. There is a lot of dirty water under the London Bridge.

Of course, the Brits don’t see it that way. They’re the bowler-hatted bastion of financial tradition and we’re the uncouth colonials.

But it’s a complex issue in an ever-more financially inter-dependent world. And equity trading is only part of what exchanges do these days. What about exposure to derivatives risk, which these exchanges are into heavily?

Canada barely dodged the bullet in the last financial meltdown. Is this the time to link ourselves to floundering Britain, and align our healthier financial institutions with Britain’s weaker ones?

There may be a time for such a merger if Canada has the upper hand. But now isn’t it, given the fragile global economy. There are too many risks for us, and too few benefits.