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July 13 (Bloomberg) -- Canada’s banks, whose independence and caution shielded them from the worst losses of the credit crisis, are refusing to risk that reputation in the battle for the Toronto Stock Exchange.
Canada’s banks and pension funds, which thwarted a bid for TMX Group Inc. from London Stock Exchange Group Plc last month, prefer the exchange to go it alone rather than join the global wave of takeovers that has seen Deutsche Boerse AG agree to buy NYSE Euronext.
“It was a unique example where Canadian interests stepped up to put their money where their concern is,” said Janet Ecker, president of the Toronto Financial Services Alliance, a lobby group for North America’s third-largest financial center. “In this case, there was angst about that happening and other Canadian players stepped up.”
Maintaining Canadian control of financial markets was one of the drivers behind the Maple Group Acquisition Corp. banking group’s C$3.73 billion ($3.86 billion) bid, which is being reviewed by TMX Group’s board. Opponents such as investor Thomas Caldwell say the all-Canada bid by Maple would threaten TMX’s global growth potential.
“These are very sophisticated organizations that have come together -- many of them are competitors in a whole variety of areas -- doing what they believed was in the interests of financial services in Canada,” Ontario Finance Minister Dwight Duncan said in a June 29 telephone interview.
Concerned about how consolidation abroad has hurt some stock exchanges, Maple claimed that London’s takeover would cost Canadian jobs and surrender control of part of the country’s securities industry to foreigners. The London bourse dropped its friendly bid last month after failing to get enough shareholder support, leaving Maple as the lone suitor. The group’s unsolicited bid expires Aug. 8.
TMX rose 0.6 percent to C$44.05 at 4 p.m. in Toronto.
After the global financial crisis, Canadian banks were in a position of strength and had reason to question foreign regulators that failed to protect banks from the financial collapse of 2008. Canadian lenders took a fraction of the $2 trillion in writedowns suffered by financial firms such as Citigroup Inc. in the U.S. or Royal Bank of Scotland Group Plc, which was rescued by the U.K. government.
During the crisis, Canada’s financial-services regulator required domestic banks to hold more capital than their global peers and the lenders didn’t require government bailouts. As a result, the country’s financial system has been ranked the soundest in the world for three straight years by the World Economic Forum. Five Canadian banks were among the world’s 20 strongest in a Bloomberg Markets Magazine ranking in May.
“I hate to say that we’ve figured it all out, but I must say that we can do things that others have trouble doing,” said Leo de Bever, chief executive officer of Alberta Investment Management Corp., one of the pension funds leading the bid for TMX. Other nations “have trouble doing that for all sorts of reasons: politics, lack of decision-making, lack of talent in the organization.”
Maple Group has said its takeover bid “preserves the regulatory structure that has served our market so well,” Luc Bertrand, Maple’s main spokesman, said in a June 28 speech.
“We think we can do better” than the London Stock Exchange’s bid, Toronto-Dominion Bank CEO Edmund Clark said in March, before Maple Group was formed. “I think the TMX is a great institution; we just think you can go further with it.”
Bertrand, a vice chairman at National Bank of Canada and former deputy CEO at Toronto-based TMX, has pointed to Borsa Italiana, which had a 54 percent drop in the daily value of trades after it was acquired by the LSE in 2007. The Italian exchange also had a 44 percent decline in initial public offerings since the sale, according to Maple Group estimates.
Cross-border stock exchange combinations don’t always bring anticipated “meaningful economies of scale,” said Andre Cappon, president of The CBM Group Inc., a New York-based consulting firm that specializes in the financial-services industry.
The New York Stock Exchange completed its purchase of Europe’s Euronext NV in June 2007. By the fourth quarter of 2008, the company took a $1.59 billion writedown resulting partly from an accounting rule change, leading to a quarterly loss of $1.34 billion, according to data compiled by Bloomberg.
NYSE Euronext has since agreed to be taken over by Deutsche Boerse to create the world’s biggest bourse operator.
TMX faces risks in going it alone instead of being part of the latest round of exchange consolidation, said Ed Ditmire, an exchange analyst at Macquarie Group Ltd. in New York.
“The biggest risks in my mind are that eventually much larger exchanges with much better resources try to take your business,” Ditmire said. Another risk would be that “they try to acquire you in a way that gives you little say in the future of the organization.”
TMX Group CEO Thomas Kloet said June 29 that the company’s board will “now take the time to evaluate the opportunities in front of us” including the Maple offer. TMX spokeswoman Carolyn Quick declined to comment when asked today whether the board had met to discuss Maple. Maple is pursuing regulatory backing for its offer, including approval from Canada’s Competition Bureau and provincial securities commissions in Ontario and Quebec.
The bid’s “transaction risk” can’t be ignored, and the TMX may remain independent as a result, according to RBC Capital Markets analyst Geoffrey Kwan, who published a note on TMX yesterday.
Maple Group’s C$50-a-share offer will be followed by an acquisition of Alpha Group, a bank-owned operator of an alternative trading system that competes with the Toronto Stock Exchange, and CDS Inc., a Canadian securities clearing house, according to the Maple proposal. Combined, TMX and Alpha control almost 90 percent of equity trading in Canada.
Maple’s banking and pension fund members have a vested interest in driving down pricing for trades, so “they should not be in charge of the mechanism for determining it,” said Caldwell, chairman and CEO of Caldwell Securities Ltd. in Toronto, which owns TMX shares and supported the LSE bid. “The conflict is huge.”
--With assistance from Whitney Kisling in New York. Editors: David Scanlan, Steven Frank
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