Post on 30-Dec-2015
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Paul M Y Chow, Chief ExecutiveHong Kong Exchanges and Clearing Limited
CEO Forum 2007City University of Hong Kong
18 March 2007
GLOBAL EXCHANGE MERGERS AND ACQUISITIONS (M&A)
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AGENDA
1. Development of exchange entities
2. In-country exchange consolidation & HKEx case
3. Cross-border exchange consolidation
4. Outlook for HKEx
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
1. Development of exchange entities
Horizontal In-country
Consolidation
Demutualisation
Vertical In-country
Consolidation
Cross-Border Cooperation
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In-country exchange consolidation brings the following benefits:
2. In-country exchange consolidation
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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HKEx followed a long history of exchange mergers in Hong Kong
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
Brief HistoryYear
HKEx was one of the earlier listed exchanges – almost a pioneer!
2. In-country exchange consolidation - HKEx case
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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)
Driving forces behind the HKEx merger in 2000
2. In-country exchange consolidation - HKEx case
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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
2. In-country exchange consolidation – HKEx Case
3. Cross-border exchange consolidation
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Client Base Home market effect limits cross-listing
potential Advances in technology and presence
of international intermediaries allow global, round-the-clock securities trading
There is limited synergy from cross border M&A of exchanges
Operations Different local market needs, including
service and product offerings Different operating procedures and
trading mechanisms Different currencies Different financial reporting and
regulatory standards
There is limited synergy from cross border M&A of exchanges
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Information Technology Different setup of infrastructure,
location and local standards present challenges to full system integration
Economies of Scale Maintaining marketplace in each territory requires separate infrastructures
• Difficult to share overheads Possible diseconomies of scale from
additional need of coordination
Human Resources Different languages, culture, local laws
and regulations Requirement to maintain separate
infrastructures may limit scope for staff reduction
3. Cross-border exchange consolidation
Other issues related to cross border M&A of exchanges
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Political and Regulatory Issues
Exchanges are often crown jewels of their home territories
• Political resistance• Ring fence• Statutory regulation and
supervision
Costly Investment Investment value declines in a bear market
Investment choices should be left to shareholders
Management and Control Issues
Difficult questions arise• Primary / leading location of key
functions and headquarters?• Primary location of data centre?
3. Cross-border exchange consolidation
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
4. Outlook for HKEx
Currently, lack of sound rationale for any cross-border M&A for HKEx
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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)
HKEx focuses on its core competence
4. Outlook for HKEx