Transcript PUBLIC EQUITY CAPITAL – CHALLENES FOR EXCHANGES IN

GLOBAL EXCHANGE MERGERS AND
ACQUISITIONS (M&A)
Paul M Y Chow, Chief Executive
Hong Kong Exchanges and Clearing Limited
CEO Forum 2007
City University of Hong Kong
18 March 2007
AGENDA
1.
Development of exchange entities
2.
In-country exchange consolidation & HKEx case
3.
Cross-border exchange consolidation
4.
Outlook for HKEx
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1. Development of exchange entities
Horizontal
In-country
Consolidation
Demutualisation
Vertical
In-country
Consolidation
Cross-Border
Cooperation
 In the first industrialised countries, stock exchanges
served local communities
 Improved technology, intensified domestic competition,
centralisation of financial activities led to concentration  Except where regionalism and related protectionism were
particularly strong
 Over the past decade, there has been a clear trend to
demutualise exchanges
 As well as merging exchanges horizontally, vertical
integration is another option
 Cross-border cooperation has been another clear trend
in the global exchange arena
 It may take different forms: MOU, strategic alliance,
investment and merger and acquisition
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2. In-country exchange consolidation
In-country exchange consolidation brings the following benefits:
 Critical mass
 Consolidation of liquidity pool
 Price formation (a single price for same share)
 Economies of scale
 Rationalisation and sharing of overheads
 Higher global profile
 Easier to maintain regulatory standards
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2. In-country exchange consolidation - HKEx case
HKEx followed a long history of exchange mergers in Hong Kong
Year
Brief History
1891
Association of Stockbrokers
1921
Hong Kong Stockbrokers’ Association
1947
Merger to form Hong Kong Stock Exchange
1969
Far East Exchange
1970s
Kam Ngan Stock Exchange and Kowloon Stock Exchange
1977
Hong Kong Commodities Exchange, later became Hong Kong
Futures Exchange (HKFE)
1986
Merger to form Stock Exchange of Hong Kong (SEHK)
1999
Decision to merge SEHK, HKFE and Hong Kong Securities Clearing
2000
Merger to form HKEx and listing of HKEx
HKEx was one of the earlier listed exchanges – almost a pioneer!
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2. In-country exchange consolidation - HKEx case
Driving forces behind the HKEx merger in 2000
 Government leadership
 Convincing rationale
•
Synergies
•
Inefficiencies of mutual form
•
Desire to create a commercial and listable entity
 Vertical integration with Hong Kong Securities Clearing valuable
 Shares / cash alternatives to members of the pre-merger entities
 Trading rights regime retained
 Catalyst:
•
Asian Financial Crisis (highlighted need for a central market operator)
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2. In-country exchange consolidation – HKEx Case
The merger has delivered tremendous benefits to HKEx and the market:
 Commercial management replaced mutual-style
 Market alignment
• Horizontally (cash market and derivatives market)
• Vertically (trading and clearing operations)
 More coordinated market development
 Consolidation of liquidity pool
 Better risk management
 Synergies
• Economies of scale
• Rationalisation
• Sharing of overheads
• Enhanced efficiency
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3. Cross-border exchange consolidation
There is limited synergy from cross border M&A of exchanges
Client Base
Operations
 Home market effect limits cross-listing
potential
 Advances in technology and presence
of international intermediaries allow
global, round-the-clock securities
trading
 Different local market needs, including
service and product offerings
 Different operating procedures and
trading mechanisms
 Different currencies
 Different financial reporting and
regulatory standards
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3. Cross-border exchange consolidation
There is limited synergy from cross border M&A of exchanges
Economies of Scale
Information Technology
Human Resources
 Maintaining marketplace in each
territory requires separate
infrastructures
• Difficult to share overheads
 Possible diseconomies of scale from
additional need of coordination
 Different setup of infrastructure,
location and local standards present
challenges to full system integration
 Different languages, culture, local laws
and regulations
 Requirement to maintain separate
infrastructures may limit scope for staff
reduction
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3. Cross-border exchange consolidation
Other issues related to cross border M&A of exchanges
Political and Regulatory
Issues
Management and Control
Issues
Costly Investment
 Exchanges are often crown jewels of
their home territories
• Political resistance
• Ring fence
• Statutory regulation and
supervision
 Difficult questions arise
• Primary / leading location of key
functions and headquarters?
• Primary location of data centre?
 Investment value declines in a bear
market
 Investment choices should be left to
shareholders
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4. Outlook for HKEx
Currently, lack of sound rationale for any cross-border M&A for HKEx
 Cross-border merger currently not attractive due to no evident synergies
• Lack of synergies with other Asian exchanges
• Synergies with other world exchanges – even more remote
• Risk of diseconomies due to distance, culture, market needs, politics, etc.
 HKEx’s profitability, ROE, cost-income ratio are among the highest of global
exchanges
 Business synergies with Mainland, but
• One Country, Two Systems
• Different market models and infrastructure
• Different regulatory frameworks
• Mainland exchanges not demutualised
• Mainland still largely closed
• RMB not freely convertible
 Vertically integrated businesses help secure HKEx’s position
• One-stop-shop service
• Overall systems investment and risk management effort
• Cross-subsidisation of costs
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4. Outlook for HKEx
HKEx focuses on its core competence
 HKEx is the vertically-integrated sole Hong Kong market operator
 Mission: “To be a leading international marketplace for securities and
derivative products focused on Hong Kong, Mainland China and the rest of
Asia.”
 HKEx’s strategies focus on
•
Market quality
•
Infrastructure improvement
•
Service enhancement
•
Regulatory integrity
 Dividend payout ratio of 90%
 Regular sharing of knowledge with other exchanges (MOU, MORC, etc)
 Maintain cooperative relationships with Mainland entities (e.g. A+H Working
Group)
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Thank You