The Tokyo Stock Exchange (TSE) may begin talks with its smaller Japanese rival on a possible merger to survive a wave of sector consolidation and fend off competition from fast-growing Asian bourses.
Atsushi Saito, the chief executive of the TSE, said combining the TSE’s dominant position in cash equities trading and the Osaka Securities Exchange’s (OSE) strength in derivatives could make for an effective alliance.
“They must be feeling a sense of crisis that they will be swallowed by the wave of overseas consolidation,” said Tsutomu Yamada, market analyst at Kabu.com Securities. “But I’m not sure simply creating an ‘all-Japan’ bourse is the answer.”
The TSE is now the world’s fourth-biggest exchange by trading volume, having ceded ground to Shanghai. A merger with the OSE would help save on system development and other costs, but may do little to reverse its -competitive decline.
Saito said the TSE was focused on listing its own shares first before any merger.
“We have that responsibility to our shareholders,” Saito told reporters in Tokyo, confirming earlier media reports of the planned talks.
The TSE has suspended plans for an initial public offering several times, most recently in 2009, and yesterday Saito declined to set a date for the next attempt saying it was up to the TSE owners, which include Morgan Stanley, Mitsubishi UFJ Financial Group and The Goldman Sachs Group.
That cautious approach appeared to contrast with the OSE, whose president was quoted earlier yesterday as saying it would prefer a merger before the TSE floated its shares. However, by doing so the TSE risks being caught in a back-door listing that circumvented its own rules that require companies to show improved profitability before any initial public offeringh is sanctioned.
A flurry of mergers and alliances among global exchanges has put the spotlight on the TSE, which is suffering from weak trading volumes and a dearth of new listings, a reflection of the sluggish outlook for the deflation-plagued Japanese economy.
Pressure on the Tokyo bourse to act intensified last month when Deutsche Boerse unveiled a deal to acquire NYSE Euronext and create an industry giant. Singapore Exchange and London Stock Exchange are also looking to grow bigger by combining operations with Australia’s ASX and Canada’s TMX Group respectively.
At the peak of Japan’s asset bubble in 1989, the Tokyo exchange’s market capitalization accounted for about 40 percent of the value of global stock markets. It now contributes just 7 percent, data from the World Federation of Exchanges showed.
The TSE controls more than 90 percent of cash equities in Japan, while the OSE is the leader in -Nikkei futures and other derivatives, as well as the home market for video game maker Nintendo and a handful of other major tech firms.
“Excluding a few stocks like Nintendo, the OSE does not have any appealing stocks for the cash market,” said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “If the OSE can focus on futures trade while the TSE could absorb the cash trade, there may be good synergies and they could efficiently reduce personnel levels and costs.”
With average daily traded value of shares at about ￥1.5 trillion (US$18 billion), the TSE, founded in 1878, remains among the world’s biggest bourses. Stocks traded on the exchange have a combined market value of more than ￥300 trillion.