Demutualisation a possible alternative

Local opponents to a possible merger of the New Zealand and Australian Stock Exchanges are concerned by continuing delays in merger proposals to their members. DANIEL RIORDAN reports.

Opponents to the merger of the New Zealand and Australian Stock Exchanges have every right to feel they are in deep space - a place where no one can hear you scream.

The void created by the local exchange's delay in putting a merger proposal to its members yawns onwards even as Parliament prepares to consider legislation allowing the interim step of demutualisation.

One of the most outspoken opponents, Macquarie NZ associate director Ian Waddell, has been told by his bosses to tone down his opposition.

Other merger opponents have either said all they can or are keeping their powder dry until the NZSE comes up with a definite plan. This includes Forsyth Barr, one of the biggest retail broking firms, whose members are believed to be firmly opposed to the proposal.

Mr Waddell reckons almost 90 per cent of members he has contacted are against the merger, although most of the brokers spoken to by the Business Herald figure the split is closer to 50/50.

Clearly, the exchange has its work cut out if it wants to tango transtasman, given its need to secure a 75 per cent majority.

Firms deriving a greater percentage of their income from private clients tend to be cooler on the merger, although members of even the big overseas-owned institutional broking firms such as ABN Amro, UBS Warburg, Credit Suisse First Boston and JP Morgan appear to be split on the issue.

If demutualisation goes ahead, each full individual member and each member firm is likely to have an equal ownership share.

Demutualisation is increasingly being seen as a middle option that would satisfy some of the concerns of members wanting a more rigorous operational structure without losing any control overseas.

However, the structure of the demutualisation bill, expected to enter Parliament next month, means there is nothing to stop shareholders selling to anyone whose chequebook is big enough and a merger or takeover being achieved through the back door.

When the ASX demutualised two years ago it did so with restrictions on how many shares one entity could own - 5 per cent, soon to be lifted to 15 per cent if the politicians agree. The exchange's 606 initial shareholders have grown to 16,300.

No ownership restrictions are contained in the NZSE proposal, which worries many.

Wellington merchant banker Lloyd Morrison, who opposes the merger, says the Government has only one chance to make a stand on the issue, and that chance is now.

By saying it will support demutualisation if that is what exchange members want, the Government has abrogated its responsibilities, he says.

"This is its only chance to get it right. Once the exchange demutualises, it can be sold off to the highest bidder."

Although brokers will be the ones voting on the merger, the issue affects the entire financial community, from companies to investors, and opinions there are as divided as in the broking community.

Keith McLaughlin, managing director of dual-listed Baycorp Holdings, says his fellow directors have mixed views, but the company's existing ability to access overseas capital (40 per cent of its shareholders are Australian) effectively renders the debate a non-issue .

But he doesn't like the thought of corporates moving their head offices to Australia with great chunks of New Zealand's financial infrastructure following, and is personally opposed to the merger.

Fund manager and shareholder advocate Oliver Saint says the New Zealand sharemarket has not been a top performer but doubts a merger with Australia would make much difference to investors.

Australia's market watchdogs have a better record of enforcement than its local counterparts, the Market Surveillance Panel and the Securities Commission, but he doubts they would have the time or resources to take much interest in NZ companies post-merger.

ASB Securities managing director Tim Preston says a good case can be made for either decision, but the devil will be in the details.

At least he won't be lurking in the void.

Five key questions


Who owns the New Zealand Stock Exchange?


It is owned by its 42 member firms, 275 full individual members and 147 associate individual members. Member firms and full individual members are entitled to vote on the demutualisation and merger proposals, giving a total vote of 317. At least 75 per cent of votes are needed to approve either move.

Who is spearheading merger discussions?


The 10-strong NZSE board, which includes representatives of seven broking firms, corporate lawyer Geoff Ricketts, Victoria University accountancy professor Don Trow and NZSE managing director Bill Foster.

Haven't we been here before?


The idea of merging with Australia is not new but it is being seriously considered for the first time. The ASX made an approach five years ago but the NZSE wasn't interested.

How far off is a merger vote?


The NZSE had hoped to put a proposal to members by the end of last year but now says that's several months away.

How does demutualisation fit into all this?


Demutualisation is a necessary, though not sufficient, condition for a merger. The NZSE has prepared a bill laying the path for demutualisation. The bill is expected to become law by the middle of this year.