Andrew Harmos: No benefit to NZX merging with ASX

Andrew Harmos says wealth is created by savings, investment and asset ownership. Photo / Mark Mitchell

Opinion

Every so often, although not so much recently, the suggestion of "merging" NZX with ASX appears, like a bear stumbling out of hibernation rekindling the last thought it had before a long winter spent comatose.

What is a little odd is that this suggestion comes from our own shores and not from our Australian cousins. For them, the suggestion of selling ASX (and indeed most of Australia's financial institutions and top companies) would arouse such a nationalistic wave of protest that no citizen concerned for their welfare would dare raise it.

It's probably healthy that the question is raised here occasionally. It provides an opportunity to remind people why the proposition doesn't warrant serious thought, why it's not on the agenda of the NZX board and why it is symptomatic of a lack of understanding of the building blocks of this nation's economic well being.

First let me say that a business with a total market value of approximately $260 million (NZX) doesn't "merge" with a business with a total market value of approximately AU$5.91 billion ($7.4 billion) (ASX). It gets taken over and swallowed. Sometimes these things are presented as a merger - but this is generally spin to appease exiting directors and unsophisticated shareholders.

ASX was at one time interested in buying (sorry - merging with) NZX but it was back in 2000, when NZX was a broker-owned mutual organisation known as NZSE. The offer, at well less than $20 million, tempted some of NZSE's broker owners. It came close to gaining traction. A coming to their senses, an appreciation of potential future value (NZSE's owners having witnessed ASX's share price rise spectacularly after its demutualisation), and extensive lobbying (actually taking the trouble to think through second order effects and express these publicly) by Lloyd Morrison, law firm Bell Gully and others, saw the proposal derailed.

It wasn't derailed on just value grounds but more importantly, on the realisation that NZSE didn't really feature in ASX's plans. Much like the New Zealand Futures and Options Exchange which had previously been sold to its Sydney-based cousin resulting in futures and options trading on NZ financial instruments - and the associated expertise and profits - migrating over to, and for the benefit of, the Australian economy.

By now you will see where I am going - and that it has more to do with just the ownership of NZX.

It's about the well being of New Zealanders relative to our Australian neighbours, which is something akin to living on the right side or the wrong side of the same town.

We have set a national goal of closing the income gap with Australia. Hand in hand with that must be closing the wealth gap between the average New Zealander and the average Australian. Jobs are critical - but jobs are not enough. People cannot and should not have to work all their lives. At some point they need a comfortable retirement; that needs savings. Savings are important, not just for retirement, but to provide a cushion against shocks and resources to enable a comfortable life - not a "barely coping" one.

Government superannuation is a supplement, not a substitute: on its own it's never going to be enough. Real wealth is created by savings and investment - by asset ownership, not by hours worked. Savings that are wisely invested can compound and grow. Hours worked and income spent on consumption cannot.

The largest component of the wealth gap is accounted for by our two countries' different savings records. These vary partly because of our differing levels of financial literacy and partly because of Australia's compulsory superannuation regime. This has had so many positive outcomes or "second order effects". It has taught an entire nation about the magic of compounding. It has ensured a huge amount of local capital for investment in productive enterprises rather than unproductive housing stock. It has created the fifth largest capital market in the world and a sophisticated financial services industry. That industry employs huge numbers of people - including well-qualified New Zealanders who can't find comparable opportunities here.

It provides worthwhile savings and investment advice and quality savings products for its people - rather than reliance on finance companies, real estate or worse still, illiquid real estate syndication products.

Thankfully we have the minnow of KiwiSaver catching on and beginning to snowball and compound - but without any compulsion (even half a per cent, please) it's never going to catch up to Australia's compulsory 9 per cent.

So, Australia's largest cities have become hubs. They have become destinations for New Zealand's head offices. We have lost a number of our companies and head offices to takeover activity. The Australian savings and capital pool has enabled Australian companies to fund the purchase of New Zealand competitors - offering enticing short-term prices in their pursuit of long-term growth and value. A number we are losing for other reasons - mainly perceptions of more favourable tax policies and larger capital market opportunities.

So, what has all this to do with the occasional suggestion that NZX's shareholders should join the throngs of asset owners who have sold their shares to Australian acquirers?

It comes back to this. Long-term asset ownership translates to long-term wealth creation. Ownership and control translate to control of decision-making. What has happened to our companies once they are sold offshore? For a while local head offices remain, but not for long. Cost cutting and efficiency requirements soon drive consolidation to one head office and, in times of economic downturn, the knife cuts deeper in the branch locations. The move is inevitably to one set of head office support teams, and the location is never here. Gold collar jobs go - with them people and families. The need for support services clusters around the head office. That drives reduced spending here, with the multiplier effect of fewer dollars spent in our economy. The tax base reduces further. The key decisions are made offshore. Our young people increasingly have to go offshore for the top jobs and then struggle to find a compelling economic reason to come home. Has anyone else noticed the number of TV commercials where the promoters speak with Australian accents? Those campaigns aren't created here - the creative spend is offshore because the NZ/Australian markets are managed from Australia.

And how much have the Arts and New Zealand charities suffered by reduced sponsorship through reduced interaction with head offices and decision makers?

So we ask ourselves - how would NZX's shareholders, and the many constituencies that NZX serves (from savers and investors to listed companies in need of debt and equity capital) benefit if NZX "merged" with the ASX? Would it make it easier for New Zealand companies to raise capital here or abroad? No - mutual recognition laws have made it simple for Australian companies to raise capital here and vice versa. Would it give our investors more protection? No. Would it give our investors more investment options to choose from? No - New Zealand investors can invest globally now. What is missing is quality local product. Would it allow NZX to adapt more quickly to local conditions as, for instance, it needed to in response to the global financial crisis? No - surely it would make it harder. New Zealand's priorities would be subsumed by Australia's and we would be a distant second in the queue.

Would it improve regulatory outcomes? Hard to see - New Zealand enjoyed a far better record than Australia over the global financial crisis with not one dollar of investor money lost here in broker default. Would it help local companies get research coverage and help build a local funds management and investment industry? In fact it would have the opposite effect. It would aggravate the brain drain.

It beats me why some keep suggesting that selling our businesses to Australia will in some way result in better outcomes for New Zealand. Why should it? Has it so far? Would we be better off if Nufarm (was Fernz), Lion Nathan, Fletcher Energy - to name a few - still had their head offices here and paid tax here? Of course we would. Are the Australians (or anybody else) likely to care for us more than we do?

Australia, with its higher levels of financial sophistication, has realised this. Is it any coincidence that its stock exchange, banks and certain other enterprises have a share cap (at 15 per cent) preventing takeover activity, without government approval, that would not be in the long-term best interests of Australia? NZX has adopted a similar formula, as has New Zealand Telecom and Air New Zealand - by restricting levels of ownership, including foreign ownership. That "Air New Zealand model" would work very well for those of our government and local authority assets (SOEs) that are suited to true public ownership. They would benefit from the governance, transparency and accountability associated with making their shares available to New Zealanders to own directly. After all, what better place to put your money than a strong utility with stable dividends? New Zealanders (and New Zealand seems pretty much alone in this) are prevented from co-investing with our government in such assets, and directly enjoying, experiencing and learning from ownership.

So - whether the discussion be about "merging" NZX or many other local businesses with much larger Australian institutions, the answer must always be the same. Unashamedly, any move must be clearly in the long-term best interests of New Zealand.

The recently published report of the Capital Markets Development Task Force recognises this. It provides a blueprint for the advancement of the interests of New Zealand savers and investors, growth of New Zealand businesses, our nation and its future. Let's rally behind the implementation of its recommendations rather than folding our cards and being satisfied with mediocrity and poor-cousin status. NZX is committed to applying its resources to this task and it will do so as a proudly New Zealand-owned and managed company.

* Andrew Harmos is chairman of NZX and a mergers and acquisitions law specialist.