Why the proposed “merger” between the TMX and the London Stock Exchange is bad news for Bay Street

Why the proposed “merger” between the TMX and the London Stock Exchange is bad news for Bay Street

(Illustration: Dan Page) 

One morning in late January, 1998, the Bank of Montreal CEO Matthew Barrett and Royal Bank chief John Cleghorn paid a visit to the editorial board of The Globe and Mail. They were there to sell us—a small group that included reporters, columnists, editors and me, then the Globe’s editorial page editor—on the new, borderless future for financial services, of which the proposed merger of their two banks was but the first step. They didn’t have to sell very hard.

All of us in the boardroom knew what was to come. As sure as the Railway Lands across the street would soon be filled with condo towers, so the map of global banking was about to be redrawn. Deregulation was picking up speed. Borders were going to be erased. Rules, such as the one preventing foreign ownership of Canadian chartered banks, would be rewritten. A handful of giant transnational banks would soon be headed for our shores. “We want to try to survive in the next century,” Cleghorn told us. RBC and BMO couldn’t afford to be “standing on the sidelines, watching the parade go by,” added Barrett. We all know how the story ended: then–finance minister Paul Martin didn’t let anyone join the parade, including intended partners CIBC and TD, a decision that infuriated the banks, but one they’d thank him for when the financial crisis hit.

Today, the same rhetoric of urgency and unavoidability surrounds the London Stock Exchange Group’s pitch to merge with TMX Group, parent of the Toronto Stock Exchange. “LSE and TMX deal inevitable” is how one headline in Britain’s Financial Times put it. Executives from the TMX and LSE are criss-crossing the country, reinforcing that message, trying to persuade Canadians that theirs is an offer that simply cannot be refused.

As with banks more than a decade ago, the world’s stock exchanges are suddenly in play. Their leaders believe they must get big and have operations in multiple countries, or perish. All are desperate to merge, acquire or otherwise bulk up, forming multi-continent trading platforms on which the sun literally never sets. Deutsche Börse, parent of the main German exchange, and Nasdaq, the second most important American stock market, are battling for control of NYSE Euronext, which owns the New York Stock Exchange and, as of 2007, exchanges in Belgium, France, the U.K., Portugal and the Netherlands. Last year, Singapore’s SGX put in a bid to buy the main stock exchange in Australia. Alternative trading platform BATS Global Markets is taking over Chi-X Europe, another dominant alternative market. Just like 1998, Bay Street is being dragged to a party that’s already in full swing.

And yet this isn’t 1998. Bay Street doesn’t see the world, or itself, in quite the same way. The worst thing to happen to the global financial system since the Great Depression turned out to be one of the best things that ever happened to Bay Street. Of North America’s nine largest banks by assets, five are headquartered in Toronto. Canadian banks are now lauded as the safest in the world, giving a whole new meaning to Peter Ustinov’s quip about Toronto being New York run by the Swiss. And that’s why, in a reversal of 1998, a large chunk of Bay Street is questioning the TSX deal, while the public and most politicians appear indifferent.

Those opposing the merger—TD has been the most vocal, but CIBC and National Bank are also critical, as is Scotiabank—are doing so from a position of strength, not weakness. Why sell? they ask. Just because everyone else is doing it? And if anything, shouldn’t the TSX be acquiring? As Harris Fricker, CEO of the investment firm GMP Capital, puts it, in every deal there is a “dinner” and a “diner.” Despite initial rhetoric about this being a “merger of equals”—language hastily dropped, given that the LSE intends to control a majority of the board seats—what’s on the table is a simple takeover. The TSX is the dinner.

So what, some say; the TSX is just a bunch of computer servers—the market doesn’t even have a physical trading floor anymore. Who cares who owns it? And yet, the stock exchange is also a kind of public trust, in that much of Bay Street’s investment banking business is built around it. This virtual marketplace is the ecosystem within which much of the Street’s financing activity takes place: IPOs, equity raises, merchant banking, mergers and acquisitions, and so on. Many of these transactions happen here and not somewhere else, using bankers based here and not somewhere else, because the TSX is headquartered here and not somewhere else. New York doesn’t need to care about who owns the NYSE, because New York is New York—North America’s premier business hub. You can’t say the same thing about Toronto.

In other words, unless you’re New York, the takeover of a stock market isn’t just another run-of-the-mill foreign investment. Which may explain why Australia recently shot down the Singapore Exchange’s attempted takeover of the ASX—a commodities-heavy stock market that looks an awful lot like ours.

Even if the TSX were the diner in the proposed deal, would it want to sup on the LSE? The British stock exchange may be larger than the TSX in terms of the value of its listings, but it’s a venerable franchise on the way down, facing challengers on all sides. It’s attempting to buy the TSX in the hopes of arresting that decline. The Financial Times recently quipped that the TSX and LSE are like “two drunks leaning on each other for support”—a great line, but it applies to only one of the parties.

Back in the late 1990s, when the banks were panicking about their futures, the TSX had an inferiority complex of its own. Its executives worried that it was too small and would be crushed by the Nasdaq and the NYSE, the biggest stock markets in the world. Instead of trying to compete with them, the TSX wisely got big by thinking small. Over the next decade, it became the world’s leading niche market. Its specialty—mining and energy—just happens to comprise both the core of the Canadian economy and the global economy’s hottest sectors. Fifty-eight per cent of the world’s public mining companies now list on the TSX or its junior exchange, the TSXV. Many of them aren’t Canadian.

Unlike the proposed bank mergers of the late ’90s, which infuriated voters, or the Free Trade Agreement of a decade earlier, which had half the electorate convinced that Medicare would be eviscerated and the Great Lakes drained into American pop bottles, the TSX deal has elicited little public reaction. The country has matured; foreign ownership isn’t seen as a threat, or even an issue. We’re in a campaign year, but it’s hard to find a politician trying to spin this for votes, one way or the other. And yet there’s a long lineup of government bodies that have to sign off on the LSE-TSX deal, or give it the thumbs down: Queen’s Park, the Ontario Securities Commission and, most importantly, Industry Canada. In April, an all-party committee at Queen’s Park recommended that the deal go forward—but only as a merger of equals, with Canadians given half of the board seats.

There are lots of opportunities to delay, modify or deny. And those opportunities should be seized. The man with the power to review foreign takeovers, federal Industry Minister Tony Clement, should throw a spanner in this deal. It’s hard to see the upside of saying yes to the merger. More importantly for Canadians—who survived a financial crisis thanks to an ancient and ingrained prudence—it’s hard to see the downside of saying no.