Elusive synergies

Asian exchanges: Magnus Bocker says there are big benefits to be had from his planned takeover of Australia’s stock exchange. There need to be, given the premium on offer. Yet investors are pricing in little value creation from the $8 billion deal. That may be because Bocker faces many obstacles to extracting synergies - among them, the exchanges’ customers themselves.

The Singapore Exchange SGX is offering a $2 billion premium for its Australian rival, based on the share prices before the deal was announced. Part of that will come from annual cost savings with a net present value of maybe $300 million. The rest will have to come from revenue synergies, like winning more trades, selling more products and attracting more companies to list.

Yet revenue benefits on that scale may be hard to achieve. SGX and ASX can already create new products on their own, so it is hard to see how merging will generate more. Longer hours may attract more trades, but will increase costs too - and the two exchanges are in similar time zones. Allowing access to each others’ listed stocks may have little appeal, since big investors already trade across borders. Regulators may also make it hard to extract value. Crunching together exchanges can mean more derivatives products and listed companies for investors on each side to choose from. But Singapore and Australia would first need to agree on a common listing standard, and accept each other’s supervision rules so that brokers can trade across bourses. That looks far off.

Revenues might even fall rather than rise as a result of the deal. Singapore charges five times as much as ASX on trading fees, and 16 times as much on clearing. Customers are likely to demand the lowest common denominator - and if they don’t get it, seek alternatives. That leaves Bocker walking an awkward line, arguing on one hand that enhanced trading opportunities will be good for customers, yet insisting that full convergence of pricing won’t be possible because the two markets will remain separate. That is hardly a knockout case. The market’s muted view of the value creation looks like the right one.