It isn't just the Maple Group, through Luc Bertrand, that is on the road selling the merits of the group's proposal to buy the TMX Group, the chief executive officers of both the London Stock Exchange Group and the TMX also touched down in Calgary this week.
From a boardroom situated in the NGX offices downtown, Xavier Rolet of the LSE and Tom Kloet from the TMX laid out the case for their merger deal. And in a world in which global linkages are becoming increasingly important, it's tough to dismiss a transaction that vaults Canada into a larger realm.
Fundamentally, the choice between the two options comes down to whether it is in the best interests of Canada's capital markets -- and the companies listed on the stock exchanges -- to stay local, or go global.
For Kloet, the deal with the LSE offers the TMX Group a real opportunity to capitalize on its strengths in a way that mirrors what's happened with the TSX Venture Exchange.
When the TMX bought the Venture Exchange, there was a good deal of hand-wringing and gnashing of teeth over the fact the little exchange that could was going to be part of a much larger organization and thus would no longer serve the junior companies.
But with 338 companies on the TSX that are collectively valued at $235 billion and are graduates of the TSX Venture, that clearly didn't happen.
The listings on the TSX Venture have continued to grow, as has the amount of capital raised -- in the billions -- by the listed companies.
Another concern that has been raised has to do with regulatory jurisdiction and whether the U.K.'s Financial Services Authority would have any authority over Toronto-listed stocks.
On this both Kloet and Rolet were very clear that the deal structure doesn't contemplate any such activity because it is a merger of the two holding companies, not the stock exchanges themselves.
What might happen, however, is that if a free-trade agreement does get signed between Canada and the European Union, it will pave the way for mutual recognition between jurisdictions. This means the FSA would be able to rely on the filing and reporting requirements of a Toronto-listed company that might want to list on the LSE without having to re-file everything. That would be a good thing.
A similar system exists between the U.S. and Canada -- called the MultiJurisdictional Disclosure System -- that has avoided filing duplication for companies wishing to list on U.S. stock exchanges.
What's clear in speaking with both Kloet and Rolet is that they are firmly in the camp that 'bigger is better' -- as is the need to offer clients a wider array of products.
"What makes me excited about the LSE -- and not just because they asked first -- is the fact they bring a host of possibilities and new products based on the fact they own 50% of the Financial Times Stock Exchange (FTSE) -- a standard bearer in the Index business. Add in our relationship with Standard & Poor's (S&P) and there lies a great suite of derivative products."
There are 120,000 indexes in the FTSE group.
The way Kloet sees it, there are three changes afoot in the stock exchange world -- one in which there will be big international exchanges that maintain a domestic focus, competing globally with a broad array of services; a second that is a true structural monopoly such as what exists in Indonesia; and a third where the entity is trying to compete globally in a hyper-competitive marketplace without any real protection.
The deal on the table is one that would vault the TMX into the first tier -- maintaining its domestic focus, but better able to compete globally. Just like the TSX Venture flourished within a bigger structure, Kloet is confident that merging with the LSE and creating a bigger footprint will be beneficial for the TMX, its shareholders, companies and investors.
If one hearkens back to the management thesis espoused by Roger Martin, the Dean of the Rotman School of Management at the University of Toronto, that is, organizations must continue to be innovative in order to stay competitive, it's hard not to conclude that what's afoot here between the TMX and the LSE is exactly that. The world is changing. They want to make sure they are able to have a bigger role in the global markets.
Strip all the rhetoric away on both sides and the question has to be what deal will ensure Canada and the U.K. remain as players on the global stage, not observers.
The reality is, with 4% of global capital markets, the likelihood of succeeding alone as stock exchanges consolidate is slim. It's one thing to have big resource endowments -- like Potash or the oilsands -- but it's another thing entirely to think it's possible to dominate a sector when you're starting with a small slice of the pie.
