Singapore Exchange Ltd. terminated its $8 billion bid for Australia's ASX Ltd. after the Australian government formally rejected the offer, saying changes to the country's financial systems were needed before foreigners could buy the bourse.
It was the first time the Australian government has rejected a major foreign takeover on national interest grounds since 2001 when Royal Dutch Shell's bid for Woodside Petroleum was blocked.
Australian Treasurer Wayne Swan said the deal would have diminished Australia's economic and regulatory sovereignty, presented material risks and supervisory issues due to ASX's dominance over clearing and settlement and failed to boost access to capital for Australian businesses.
"It's not the right deal for Australia if we want to enhance our links into global capital markets. It's not the right deal for Australia if we want to grow our role as a financial services hub in Asia," Swan told reporters on Friday.
Swan said he would not oppose future deals if they protected Australia's financial architecture, enhanced the country's standing as a financial services centre in Asia, boosted access to capital for Australian businesses and supported growth in high-quality financial services jobs.
Some traders and commentators in Australia however, were skeptical about the government's reasons for blocking the deal. They said concerns about the clearing and settlement system were a smokescreen for what would have been a politically-sensitive decision for the minority government, which relies on the support of independent members of parliament to support decisions.
"Defining what is 'in the national interest' in a world of increasingly free capital flows is at best difficult, or worse, a highly subjective, bordering on xenophobic, construction," said Matt Robinson, senior economist at Moody's Analytics.
Australia's shadow treasurer, Joe Hockey, accused the government of bungling the decision-making process.
"Wayne Swan has turned Australia's international reputation into that of a third-world country. His bungled decision-making process has reflected poorly on Australia in what has been a complex commercial process," Hockey said.
The proposed merger had already been cleared in December 2010 by the Australian Competition and Consumer Commission, which said at the time it would not oppose the bid.
The competition watchdog said then that SGX did not compete with ASX for share market trading, clearing or settlement purposes. Its decision followed extensive consultation with a range of market participants, it said.
The deal's rejection puts SGX CEO Magnus Bocker in a bind because he will struggle to find future merger partners in Asia due to the reluctance of governments to sell national assets. Takeover bids by European or U.S. exchanges are hampered by SGX's rich valuation.
"Growing nationalism on supposedly national assets would continue to be a major roadblock for cross-border deals," said Christopher Wong, a senior investment manager based in Singapore at Aberdeen Asset Management which owns both SGX and ASX shares.
Analysts and exchange officials have said tough regulatory regimes, cumbersome ownership structures and protectionist minded governments makes consolidation of bourses harder in Asia.
Wong said SGX could explore a tie-up with a developed market such as the London Stock Exchange to provide the bridge for a global exchange.
But SGX's hefty valuation, due to its presence in Asia's growth market, is an obstacle for Western exchanges to launch a takeover bid, analysts said.
A recent UBS research note estimated European bourses are trading at an average of 11.1 times 2012 earnings and American exchanges at 13.3 times versus SGX's 19 times.
Another obstacle for a foreign bid is a requirement that any bidder seeking 5 percent or more of SGX needs to obtain the approval of the central bank.
Financial exchanges around the world are chasing cross-border deals to build scale and cut costs amid increasing competition from alternative trading platforms such as dark pools.
The Tokyo and Osaka exchanges are in talks, Deutsche Boerse is competing with a partnership of Nasdaq OMX Group and IntercontinentalExchange to buy NYSE Euronext and the London Stock Exchange is looking to combine with Canada's TMX Group.
Bocker, who stitched together seven Nordic bourses to create OMX, later sold to NASDAQ, may have to seek partnerships and alliances instead of full-fledged mergers.
"The SGX management will continue to look for other growth initiatives, which could come in the form of cooperation on other levels with ASX, set up more cross-listing platforms with other exchanges or attract a deeper pool of regional companies to list in Singapore," said James Koh, an analyst at Kim Eng Securities in Singapore.
SGX said on Friday it would pursue other strategic growth opportunities in the region and continue talks with ASX about other forms of cooperation.
ASX said in a statement it still wanted to join the stock exchange consolidation sweeping the globe and would work with the government on any reform process.
The Australian government's rejection, partly due to fears about losing control of Australia's clearing and settlement systems, effectively closes the door on SGX or any other party making a revamped offer for ASX for the time being.
With concerns focused on clearing and settlement issues, Swan indicated the country's financial systems face an overhaul that analysts believe could result in ASX being forced to spin-off some systems.
"A lot of exchanges across the world do not own the clearing and settlement systems. There is a lot of speculation about the need for the Australian government to step in, in times of crisis. Apparently the government does not have that ability now," said Mark Nathan, portfolio manager at Arnhem Investment Management in Australia.
Swan said he was concerned Australian capital and jobs would move to Singapore under the deal and rejected suggestions the deal would provide a gateway to Asian capital flows.
However, he said Australia was not closed to other offers, provided reforms to clearing and settlement systems were carried out.
"I remain open to the right deal for Australia if it comes along. And that is of course why I have asked the council of Australian regulators to advise me on how we can continue to ensure the strength and stability of Australia's financial system if there was a fresh application."
SGX shares were trading more than 2.5 percent higher on Friday at S$8.36, while ASX shares slipped 0.4 percent to A$33.33.
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