Two options currently exist for the future of the TMX Group—a merger or a takeover. Neither scenario is without problems.
In February, the TMX and the London Stock Exchange Group announced plans to merge. Some, including Ontario Finance Minister Dwight Duncan, warned Canada risked losing control over its capital markets if the merger proceeds, a claim the TMX rejects.
Over the weekend, a group of nine Canadian financial institutions (dubbed the Maple Group Acquisition Co.) announced a $3.6 billion bid for the TMX, billing it as a made-in-Canada solution. But under that proposal, a significant degree of control over financial market infrastructure would be consolidated among a few institutions, leading to a near monopoly.
Duncan welcomed the bid, telling Bloomberg news, “I look forward to Canadians having a chance to look at an alternative bid that includes Canadians.” Indeed, the Maple Group has brought national pride into the debate. And if the question facing the future of the TMX is really one of patriotism versus competition in capital markets, patriotism is the heavy favourite to win.
“When the LSE/TMX merger announcement was initially made, we stated that we believed the success of the deal would ultimately hinge on public opinion,” writes GMP Securities analyst Stephen Boland in a recent note. “We take a similar stance on the current proposal, but note that the power of Canadians’ national pride should not be underestimated.”
Patriotism is a much more visceral sell to Canadians than why consolidating control over capital markets plumbing among banks and pension funds can be problematic—though Tom Caldwell, for one, is taking up that cause. “I don’t know if what the banks and pension funds are creating will actually be good for Canada in the long run,” he told Canadian Business yesterday. (For more, see the upcoming issue of CB out on May 19.) The patriotism issue also puts the LSE in a tricky position. A counteroffer for the TMX amounts to a takeover, laying waste to the idea that the deal is a merger of equals.
One element of Maple’s proposal that will need approval from the Competition Bureau is the integration of the Alpha Group into the TMX. Alpha is an alternative trading platform set up by the banks to compete directly against the TMX. The company even announced plans to launch a new listings exchange to compete with the TSX and TSX-V, and a derivatives business. If the two entities combine, the TMX would control well over 80% of equity trading volume in Canada.
Maple addressed the issue in a couple of conference calls yesterday led by Luc Bertrand of National Bank, one of the group’s backers. He pointed out that when examining competition, one can’t only look at Canada. Instead, the exchange business is global. From that perspective, the TMX is actually a small player competing against giants.
One of the most vocal critics of the lack of competition in financial markets in Canada has been Jos Schmitt, the CEO of Alpha. Last week, before the Maple bid was announced, Schmitt talked to CB about how Alpha is preparing to launch its listings and derivatives business to compete with the TMX. “We’re looking at the other areas where the TMX is still abusing its monopolistic position,” he said.
Schmitt struck a slightly different note when he spoke with CB yesterday afternoon. (Four of Alpha’s backers, with the exception of RBC and BMO, are involved in the Maple bid.) Contrary to those who say rolling Alpha into the TMX hampers competition and the takeover bid amounts to a monopoly, Schmitt doesn’t believe the proposed company will abuse its position.
“Their intent is, on the contrary, to leverage all of the strengths of the market infrastructure components in this nation to create something really focusing on liquidity, efficiency and effectiveness,” he says. “What’s happened over here is we got a monopoly that was a bit out of control and solely driven by shareholder value creation, and lost sight of their clients. I would not see Maple taking that direction.”