Merger as a Way to Cooperate - Essay Example

Companies at times join forces to create new business entities which become more powerful s that combined their monetary, human capital, and technological capacities to create new firms that are able to better compete in the marketplace. The combination of two or more independent business corporation into a single enterprise which is accomplished by one firm purchasing the assets of the other or by purchasing its equity stocks is called a merger (Britannica). The history of mergers dates back to the 1960’s when these arrangements occurred mainly for financial synergy, tax deductions and governmental incentives (Zhang 3). Mergers continued to occur in the 1970’s and 1980s but it wasn’t until the 1990s that mergers started to occur for a different reason. After 1990 mergers were being form to obtain operating efficiencies among two entities to compete against other players in an industry. Mergers have occurred in many industry including the airline, computer and retail industry. A particular business segment in which merger activity was not a common occurrence was among stock exchange institutions. There had been mergers in the past, but recently this segment of the financial services industry has been bombarded by multiple huge types of merger transactions among players in this industries including transaction across different international boundaries. This industry has changed and new alliances are changing the rules of the game. This paper studies the new tendencies of merging among stock exchanges and it describes the implication these new tendencies have in the Canadian exchanges and the investment atmosphere. A stock exchange is a place on which shares of stocks and common stocks equivalents are bought and sold, basically a marketplace for financial assets (Investorwords). There are numerous stock exchanges in different parts of the worlds such as Canada, the United States, Australia, Japan, London, China, Europe among other locations. All these marketplace work independently but always have cooperated with each other when possible to satisfy the needs of clients when orders where placed for stocks not traded in their particular marketplace. The stock exchange business interest in the stock market is to have companies registered their stocks with their particular stock exchange to benefit from commission transaction of having companies participate in their particular exchange. The competition among exchanges became fierce and like other industries cost began to rise due to inflation and capital invest requirement for the newest technologies to satisfy the information technology needs of the exchanges. Corporations in this marketplace began to realize that it would be beneficial for certain companies to joint forces to obtain economy of scales saving related to creating mergers based on operation justification. The biggest player in financial segment has always been the New York Stock Exchange (NYSE) which is the home of Wall Street and the over the counter market known as NASDAQ. During the last decade NYSE had began to lose some of its power due to the competition and surging marketplaces nearby such as the Toronto Exchange. During the recent wave of mergers in this industry the NYSE along with NASDAQ were right in the middle of things and their moves forced other players to react and joint forces to compete against them. World-wide exchanges overviews and major merger moves There have been numerous mergers among stock exchanges worldwide. The New York Stock Exchange joined forces with Europe’s Euronext Exchange and is also currently targeting takeover bids on the New York Mercantile Exchange (NMX) and the Intercontinental Exchange (ICE) (Sears). The NY & Europe alliance globalization type merger is mutually beneficial since Europe gains the NYSE technology while NY gains new the European clientele from Euronext. NASDAQ did not stay with its hands crossed in the recent merger activity. NASDAQ tried to merge with the London Exchange, but negotiation failed and they ended up buying 25% corporation; they also merged with OMX, a Nordic technology and exchange company (Sears). The London Stock Exchange merged with the Borsa Italia exchange (Brisbanetimes). In Asia there have been serious negotiations between Asian markets to join forces. There is a proposed deal for the Hong Kong Stock Exchange, the Shanghai stock exchange, and the Shenzhen stock exchange to join forces and merge (Tschang, et. al. 2). The two Chinese exchanges need Japan more than the Hong Kong Stock Exchange needs Shanghai and Shenzhen, but in order to compete with the powerful US and Europe markets Hong-Kong is considering the move. The Australian market is ready to shuffle its cards and make a merger move, but has not decided who to join forces with yet even though is leaning towards the US market. The current merger activity and the proposed merger in the workings would give the NYSE and the NASDAQ market shares of the trading of shares market of 49% and 47% respectively (Gordon). The power these two firms have gained are revolutionizing the industry and changing the rules of the game. The mergers and tender offers associated with the wave of exchange merger activity reached up to 27 transactions so far (Gordon 8). In order to protect the consumer from antitrust activity the Security and Exchange Commission is closely monitoring all this activity since most of the activity is leading towards the US dominance in this market and consumers worldwide must be protected after the alliances. A new rule went into effect on April 2006 that changed the way stockholders operated on the floor of the exchanges. Under the new trading rule brokers will be required to obtain the best possible price for the customer after an order is placed even if it means going to another market and the transaction takes a longer of period of time to be finalized (Gordon). In the past the stockbroker had the option to choose its preferred market and could disregard the best possible price available for their personal interest in the transaction. All exchanges must upgrade their system to have full electronic pricing availability, in the mean time only those transactions in which full electronic cross-referencing is available apply for the new rule. Implications for the Canadian investment markets The Canadian exchanges are feeling the pressure and they realized that in order to compete they must form alliances themselves. After seeing Hong Kong which is much larger market than Canada start negotiation with China to merge and joined forces in the exchange markets Canada knew it had to puts it difference aside with other local markets and merge to consolidate forces locally to compete against the new powerhouse south of their border. The Toronto Stock Group (TSX) is the cornerstone of the Canadian financial system and the main centre for capital equity movement which in September of 2007 had 7.07 billion transactions with a value of $129.8 billion (Tsx). Since TSX Group is the leading exchange in Canada they are the ones that need to make the moves in order to consolidate their worldwide status. The TSX started to make its moves and it put its differences aside with main competitor in its local market The Montreal Stock Exchange seeking merger deals between the two Canadian based exchanges (The New York Times). The move is being lead by a group of 10 major shareholders in the TSX which are opening the doors to start negotiation with the Montreal firm, so far in the early stages of preliminary talks Montreal has not shown tremendous interest in the deal (Krauspoff). It is the most logical step for both firms, even though it could take a little time it makes business sense and it should eventually go down for the sake of the Canadian marketplace. Prior to recent attempts to join forces with the Montreal Exchange, the TSX had already made its first merger move in the Canadian market by joining forces with in a merger transaction which created TSX. TSX is a merger transaction of the Vancouver and Alberta stock exchanges which was called CDNX before it was restructured and bought by TSX Group (About). The Canadian division of the NASDAQ is already being affected by the new business environment in the stock exchange market. Since the Canada division of the NASDAQ belongs to the NASDAQ Corporation which is US based the new stockbroker rules which forces brokers to find the best possible price now matter where for a transaction, applies to the activity of this division. The rule in itself creates heavier competition worldwide for business of equity transaction and its actual effect on the division is unknown due to lack of information on how competitive these divisions are and actual inter-transaction costs between different exchanges on different types of transactions. It could be said that if this division is small the most likely scenario is that the rule could be detrimental to the division, but this assumption is only an opinion and is not based actual evidence on the matter. Conclusion Mergers are a part of the business environment that has been occurring for over 40 years. It had been present in many industries, but not until recently has its effects been felt in the stock exchange institutions which is a segment of the financial services industry. There have been over 25 merger type transactions in recent years among exchanges and more of them are expected in the near future. The biggest winners out the entire merger moves have been the NYSE and the NASDAQ. New rules have been created by the SEC in the way business in perform by stockbrokers to protect consumers after all the alliances. The Toronto marketplace has been affected by all the moves and its biggest player the TSX is looking to consolidate forces in its local market to lower operation costs. The main target for a merger transaction of the TSX group is the Montreal exchange. Mergers are a business reality that comes in waves once a key player gets the ball rolling and starts to joint forces with other powerful companies. The other players in the system have to follow suit and consolidate forces to compete on a business and operational level to maintain reasonable profit margins. The Canadian markets need to follow suit and consolidate to grow and compete against the powerful US financial markets. The future of the equity market is in the Canadian exchange corporation’s hands. Works Cited Answers.com. 2007. “TSX Venture Exchange.” 2 November 2007. Brisbanestimes.com. 30 October 2007. “ASX ready for exchange consolidations.” 4 November 2007. Britannica.com. 2007. “merger”. Encyclopedia Britannica Online. 28 October 2007. Gordon, M. “The Return of the Tender Offer.” Directorship 33.5 (2007). Gordon, M. 20 May 2005. “SEC Chairman Comments on Exchange Mergers”. SmartPros. 5 November 2005. Investorwords.com. 2007. “Stock Exchange”. 27 October 2007. Krauspoff, L. 31 August 2007. “Shareholders to Push Canada Exchange Merger Report”. Reuters. 6 November 2007. 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