If a corporate merger of Toronto’s TMX Group and the London Stock Exchange Group “is bad for Bay Street lawyers, then it must be good for the country.” That joke has been making the rounds in financial circles ever since federal Industry Minister Tony Clement announced a review of the proposal under the Investment Canada Act—which, in uncertain terms, requires cross-border M&A activity to deliver a “net benefit” to the nation.
But political concerns over how Canadians will react to the $7-billion transaction are no laughing matter, since they now threaten a deal that could help grow the sorts of global corporate champions that Canada’s protectionist crowd craves.
TMX operates various Canadian capital markets, including the Toronto Stock Exchange, and the TSX Venture Exchange. The deal is being sold as a “merger of equals,” and if it is approved, TMX CEO Tom Kloet would become president of the combined company while TMX chief financial officer Michael Ptasznik would become CFO. They would remain in Toronto, which would serve as a co-headquarters for the combined company, while TMX operations would benefit from improved stature on the world stage and synergies related to administration, not to mention joint development of strategic technologies required to compete with alternative markets that have been eating away at the customer base of traditional exchanges.
However, Xavier Rolet, current head of the London exchange operator, would run the new company out of London. And that has raised the spectre of lost financial and legal jobs, sparking a debate about whether or not local stock markets should be treated like banks and broadcasters—national treasures to be protected from foreign ownership.
Ontario Finance Minister Dwight Duncan has criticized Kloet and Rolet, calling them “storytellers” without a good story to tell. He has signalled his lack of support for the deal by pointing out Middle Eastern interests would own a significant stake in the combined company, since the Qatar Investment Authority and Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum are large LSE shareholders. Duncan has also suggested Ottawa should consider looking at TMX as a “strategic asset in a strategic industry.” Tim Hudak, leader of Ontario’s opposition Progressive Conservatives, has expressed similar views.
The issue has a lot of people sitting on the fence. Marcia Smith, vice-president of corporate affairs at Teck Resources, thinks it is too early to form an opinion. “It could be good for Canada,” she says, “but it’s too soon to tell.” Even the Conference Board of Canada has yet to weigh in on the subject.
But the deal also has plenty of fans, who argue the merger would it make it faster, easier and cheaper for Canadian companies to tap into another pool of capital by listing overseas, where some major institutional investors must limit shareholdings to London-listed companies. Toronto trader Jeff Stephan points out that TMX “is already an international entity, considering its scope of purpose and global reach with investors and public companies.” Noting Ontario is headed to the polls this fall, other supporters point out TMX also operates markets in Alberta, British Columbia and Quebec, where politicians are not expressing any concerns over the deal.
“I think the opposition is misguided,” says Ian Telfer, chairman of Goldcorp. He notes TMX competes in an international industry where consolidation is key to survival. “The TSX can’t avoid the consolidation of financial markets that is occurring. If they miss this almost merger of equals, they will be swallowed by the next wave and be a bit player in some mega exchange.”
What many people fail to realize, says Kevin Cowan, TSX president, is that this is a merger of parent operations. The way local exchanges operate will not dramatically change because they will still function independently and be regulated by Canadian watchdogs. As for control, the merged company will run exchanges in Britain, Canada and Italy, where the LSE controls Borsa Italiana. And while Canadian ownership of local exchanges will be diluted, at least initially, directors appointed by Canadian operations will outnumber the ones put forward out of Britain and Italy.
Ontario’s finance minister says there is “clear angst” over the merger on both Bay Street and Main Street. That may be true. But Canadians were clearly more concerned when foreign interests tried to acquire Potash Corp., which was blocked by Ottawa after Saskatchewan raised concerns over losing control of a strategic national resources company.
If serious opposition to the deal exists in the business community, it is hard to find. Indeed, a COMPAS poll conducted for this magazine found the number of corporate leaders supporting the deal outnumbered Negative Nellies by a wide margin. Financial professionals yawn at the issue. “I don’t know anyone with strong feelings for or against it,” says one banker.
Nevertheless, mar-kets are betting against the merger, pricing TMX stock below the $43.89-per-share offer. Thomas Caldwell, CEO of Toronto’s Caldwell Securities, thinks the chances of a successful completion of the deal are now a coin toss, at best. “It’s not about the business case,” he recently told Bloomberg. “It’s about politics.”
Lorne Abony, CEO of Mood Media, which trades in both markets, says that’s a shame. He is one of Canada’s most respected entrepreneurs, and he thinks a merger would be an “awesome” benefit to Canada because it benefits Canadian companies.
“If Bob Smith starts a company in Canada,” Abony says, “and Jim Jones starts an identical one in London, Jim Jones has a competitive advantage from the start because of better access to capital. If the merger works, he won’t.”