The article below, No benefit to NZX merging with ASX, was written by NZX Chairman Andrew Harmos and was published in the NZ Herald on January 18.

No benefit to NZX merging with ASX
NZ Herald – Monday Jan 18, 2010

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.

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See this weeks lead story in New Zealand Farmers Weekly by Tony Leggett on NZX’s acquisition of Country-Wide Publications Limited.

This year, prior to the NZX Annual Meeting, the Hon Simon Power will be delivering a presentation on the
Regulatory Vision for the NZ Capital Markets – Key Principles and Priorities, which will commence at 8.00am. The sixth Annual Meeting of shareholders of NZX Limited will run from 8.30am, which you are also welcome to attend.

Please RSVP to Lucy McFadden, NZX Communications at lucy.mcfadden @ nzx.com or by phone on (04) 496-2890.

Welcome back, and I hope everyone is looking forward to another year of opportunities to contribute. Some quick thoughts from me, in a pretty busy period:

• Where the world is at right now is still pretty interesting. Failure of Nortel gives a strong sense that corporates, as well as individuals, are hoarding cash rather than spending/undertaking business investment. Jobs cuts and losses globally are mounting quickly, and revisions to the downside are tennis match to “love” in the tennis match with the “upside revisions” thus far. This will change…
• New Zealand remains well positioned compared to other countries, and does have a real chance, still, to come out of this global tumult very well on a relative, and potentially absolute basis.
• The Prime Minister’s Summit on Employment is a strong signal from the PM that there will be public/private sector cohesion, which is a positive change of tone.
• It is very important that, like with the response to Swanbelly and Lloyd’s “Measurable Goal” that everyone thinks hard about new ideas, and what they or their organizations can tangibly do…

In terms of the NZX Blog,  the focus which grew up around the Swanbelly releases and your feedback – the economic future and growth focus of the NZ economy -  will remain consistent, the topics will move on, and obviously the upcoming Summit on Employment will be a reasonably big one.

On this site, we are in agreement that we urgently need a clear, coherent economic strategy that resonates with the country, and leads to great outcomes.  To achieve great results will require:
 
(i) a single, clear “organising idea”
(ii) a new form of national dialogue
(iii) improved public-private sector trust-based relationships

However, almost as important as ‘what’ the strategy is, is ‘how’ the strategy is created and then executed.  In my view, policy making in New Zealand has recently come to be characterised by its secrecy, its closed nature, and its insularity.  The public sector sees the private sector as ‘vested interests’ and thus, despite their training, naturally discount ideas as being driven by purely pecuniary interests. The private sector see public sector as out of touch, irrelevant and politicised.  Neither of these views are true.  Both need addressing, and the past approach will not do that.

There have been a lot of comments on this on the blog.  Some comments on this so far on the NZX Blog:

Jane said, “The government should be “of the people”, not a fortress.”

Baruch said, “… build a wider constituency of support”; and

Peter said, “[put] these concepts in a simpler format”.

When the private sector is engaged, it typically manifests as large committees, ‘talkfests’, and other inauthentic engagement, with most of our contributions inevitably disappearing down a black hole.  We need to avoid jamboree type talkfests with large numbers of people (a la Knowledge Wave, Ruddfest).  Equally small, ‘closed’ groups hatching plans in closed rooms, will not get it done. 

We think that there is a very large and diverse group who should be part of this debate, and this group is all Kiwi’s – whether living here or expat.  The question right now is, how to best engage all their talent and ideas? 

I have some thoughts as to how this could occur, but would prefer to hear from everyone else first, especially the online community, as to the “how”.

Today we have released round two of Swan Dive or Belly Flop?  This version is very different, and, we believe much improved on, the previous version.  

We’re two weeks out from the release of our original draft strategy, and the economic face of the world is wearing a decidedly unhappy expression.  This piece from a BBC blog is particularly telling. 

“Swan Dive or Belly Flop?” is doing its job.  There are some exciting and pragmatic ideas being generated on this blog, and real galvanisation behind the idea of a “vision” for New Zealand’s economic future.  By “vision”, our bloggers don’t mean “slogan”.  We all know the downsides of sliding into sloganism.  They mean a strategy with a set of clear organising ideas, with clear outcomes, so we all know what we’re working towards and, importantly, can measure along the way how far we have to go before we’ve achieved it.  

Feedback has been outstanding, and will be incorporated in the next version, to be released next Friday. Feedback has refined some ideas, added others, and forced us to look very hard at some of the original ideas.  Some people have certainly disagreed with us.  Great!  Fantastic!  Did we say we had all the answers?  Don’t think so.  What we did say was that the discussion and debate had to be had – and now – if we were to take advantage of the opportunities the current crisis has opened up for this country.  

One idea in particular has received a lot of attention. While we’ll address it in detail in the next version, it is worth briefly noting. It is the home focus proposal for the NZSF and taxpayer savings pools. It has been criticised as impure. We’ll address the positive reasons for this approach in the document, but it’s worth debunking the theoretical criticism. Under the perfect asset allocation theory (i.e. the “best practice asset allocation” of the NZSF mandate), each country, and individual, allocates capital efficiently according to portfolio theory. If this is the case, then local capital and foreign capital are perfect substitutes. Hence, all local investment opportunities are taken up, because the perfect amount of capital is allocated to each country. 

But how does this work in the real world for a small country like New Zealand, that chooses to export its major pools of savings for investment? Well, it only works if, and only if, the rest of the world has no home bias, and allocates their savings globally perfectly in accordance with that. As we know, home bias is real, it is strong (e.g. over 70% of US savings are invested in the US yet is is 25% of the world economy), and – to the extent that New Zealand bases its savings direction policies on a theory that breaks down in practice – we’re consciously creating an underfunding situation at home. Working through this market failure, systemic home bias in countries with savings pools bigger than ours must result in plentiful underfunded investment opportunities in New Zealand. Accordingly, the efficient (i.e. lowest cost, highest return) portfolio decision for an asset allocator in a small country with a global home weight bias, is to significantly overweight home investments, as that’s the main place returns will be not competed to the lowest level for the investor.

Another key point that has come through is the lack of cohesion between the public and private sectors, and a lack of trust in the public sector’s ability to execute a strategy, and engage the public in it successfully. A number of ideas came through on how to address this major execution issue, and they will be in the next version. 

While there are real differences in views on some issues, regarding the idea that real, urgent and strategic action is what will define the success of this country into the future, there is consensus. We agree.