Vik’s Pick: TMX takeover leaves questions

By Vikram Barhat | August 9, 2012 | Last updated on August 9, 2012
3 min read

In the end, they were destined to exchange trading vows.

With 91% of TMX shares tendered to the $3.8 billion takeover offer, Maple Group Acquisition Corp, a consortium of Canada’s leading banks and pension funds, now officially owns TMX Group Inc.

The happy union came after a year-long bidding war that had all the elements of a Hollywood potboiler – overtures, hostility, doubts, multiple suitors and, of course, the jilted London Stock Exchange Group, a prominent feature of the opening sequence.

The TMX Group, which repeatedly rejected the Maple bid, expressed a range of sentiments at various stages of the rollercoaster ride.

Last May, it said: “[The Group] has determined, after consultation with its financial advisors and outside counsel, that for purposes of its merger agreement with London Stock Exchange Group, the Maple proposal does not constitute a superior proposal nor could it reasonably be expected to result in a superior proposal.”

Thomas Kloet, TMX’s chief executive officer, called the LSE-TMX merger “the right deal for the Canadian capital markets and for our institutions or investors…for the community as a whole, it’s the best deal they can [expect].”

The Guardian was perhaps the only British media outlet to suggest Maple’s “rival offer could well succeed given the Canadian banks’ considerable firepower and national sentiment backing them.”

Few took heed.

In fact, when the bidding war heated up, TMX Group defended the trans-Atlantic merger in a conference call. Xavier Rolet, chief executive of LSEG, called the Maple proposal opportunistic, and said it would cause considerable uncertainties and disruption for TMX shareholders.

Kloet, who reiterated TMX Group’s continued support of the foreign deal, said, “Under the Maple transaction the institution is being sold and 80% of current equity owners’ interest is being extinguished.”

In the end, Maple Group outgunned LSEG, and the deal closed July 31. Kloet will be CEO of the newly merged entity. In addition to the Toronto Stock Exchange, Maple will own the alternative Alpha exchange and the country’s largest clearinghouse, CDS, responsible for about 90% of trading in Canada.

The approval of the Maple deal is a giant step toward creating a stock exchange monopoly. Industry stakeholders fear that Maple will no longer feel competitive pressures that induce innovation, cost reduction and quality control.

But Ian Russell, president & CEO, Investment Industry Association of Canada (IIAC), says commitments put in place by Maple and regulators have allayed many of the fears surrounding the deal.

“[They] ensure appropriate protections are there in terms of pricing and access to services for the consumers,” he says. “Interactions of Maple with all of the regulators, the Competition Bureau, and the securities commissions have culminated with the recognition order [issued on July 4] by the OSC, which extracted major concessions from the Maple Group.”

Two questions remain. First, will Maple honour the commitments it made to secure the deal? Second, will its exchanges offer competitive pricing?

The IIAC says the OSC has ensured adequate protections are in place for all services offered by Maple. And while Maple’s dominance of the equity trading space is bound to change the Canadian securities landscape, Russell hopes the changes will be for the better.

“Maple has argued that as they bring these services [trading, clearing, settlements, and market data] together, both in terms of the economies of scale in trading and the vertical integration of trading and clearing [facilities], they will be able to extract efficiencies and synergies in service that will get passed along to investors.”

Industry participants also expect the integrated entity to create higher profile for Canadian equities markets worldwide. This means the new, more sophisticated operation could either provide stiff competition for foreign stock exchanges — or become a target ripe for a takeover bid.

Vikram Barhat