In a cash and stock deal, Singapore's stock market operator is offering A$48 (U.S. $47.11) for each ASX share, consisting of A$22 in cash and 3.743 SGX shares per ASX share. The offer is at a 37% premium to what ASX shares traded on Friday.
"The combination of ASX and SGX, offering innovative new products and services to the market, will allow customers to maximize future opportunities, where Asia Pacific takes center stage globally as the source for capital, wealth creation and trading opportunities," SGX Chief Executive Officer Magnus Bocker said in a joint statement.
"More than anything, this deal will help with the marketing story to attract company listings," Simon Bonouvrie, an asset manager at Platypus Asset Management Pty. in Sydney, told Bloomberg. "The tie-up, however, would also give listed companies easier and more seamless access to deeper capital markets."
Experts predicted the move could start a consolidating trend in Asia as other exchanges look for defensive mergers to gain international appeal, starting the move toward a new business model for Asian markets.
"This is a question of not only creating new opportunities for existing customers, it's a question of staying relevant in a rapidly changing market," said Bocker.
Singapore wants to lure business away from other Asian exchanges by offering a deep, liquid market for clients with lots to spend, like high frequency traders.
The merged exchange would be known as ASX-SGX Ltd. and listed on both exchanges, with annual revenue of $1.1 billion and annual savings of $30 million. Both companies would remain separate legal and locally regulated entities.
The merger will create the second largest exchange in Asia in terms of market capitalization with $12.3 billion, after Hong Kong's $24 billion. It will have the second largest base of institutional investors with combined assets under management of over $2.3 trillion.
The new group would also offer the region's largest listing of exchange-traded funds and real estate investment trusts. Bocker said it will have a stronger opportunity for initial public offerings and derivatives business growth.
"This may be the first step in the reorganization of the equities market structure in Asia," Neil Katkov, head of Asia for the consultant firm Celent, told The Wall Street Journal.
Singapore in years past has struggled against bigger exchanges like Hong Kong for listings and initial public offerings. Hong Kong has nabbed Asia's four biggest IPOs since 2006.
"Bigger exchanges can attract bigger participants or bigger product listings," CIMB Research analyst Kenneth Ng told The Journal.
Australia's exchange welcomes the deal, as it will face more competition next year from the electronic trading platform Chi-X Global Inc., which plans to open in March and cut into ASX's trading volumes.
Australia currently has 21 listings with daily trading volumes over $50 million, compared to 18 in Hong Kong and 699 in the United States. SGX has only two.
The deal still has to clear major regulatory hurdles, including getting the Australian government to lift a 15% cap on foreign ownership. Singapore's government has a 23.5% stake in the country's exchange. But SGX's Bocker and his Australian counterpart Robert Elstone said they were highly optimistic the deal would go through, citing only "informal soundings" on which neither would elaborate.
"By definition, if they had been negative in character, Magnus and I would not be sitting here today," Elstone said Monday.
SGX investors reacted unfavorably on Monday, with shares falling 6.2%, the biggest drop in two years. ASX shares climbed 19% -- its biggest jump since November 1998. Analysts said SGX's offer is overpriced, but is still the kind of opportunity aggressive Singapore has been wanting.
"It's overpriced, but sometimes if you want to buy somebody you have to pay a premium, it's just that shareholders may respond negative," Goh Mou Lib, head of research at Asiasons WFG Financial Ltd., told The Journal.
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