When is a merger not really a merger?

TSX/LSE Merger Part 5

You’ve got to sympathize with the leadership at the Toronto Stock Exchange. They have a great idea, at least from their vantagepoint, and quickly find themselves tied up by nationalism and politics. The very same swivet that former BMO Chairman Matt Barrett found himself in when then RBC Chairman John Cleghorn proposed a tie-up. Not that this should come as a surprise to the TSX after the Potash episode (see prior post “BNN TV SqueezePlay Potash Interview” Oct 29-10), mind you, but it must have them pulling their hair out just the same.

The TSX’s challenge is even harder than BMO’s, given the tall order of communicating that this proposed merger isn’t really a merger at all. Not even a business combination. Think of it as a “joint venture”.

You see, contrary to what some of us thought, the TSX and LSE aren’t merging their exchanges. They are just merging the two businesses, such as IT, electronic trading, management and the board of directors. If your company is listed on the TSXV today, that’s not going to change under the proposed merger: “there are no plans” to combine the AIM with the TSXV, for example, according to TSXV President John McCoach.

Mr. McCoach was kind enough to call yesterday to point fact this out, which speaks to the communications challenge that the TSX has. They can’t deal with every thoughtful concern personally. I’ve known him for years and his heart is in the right place when it comes to financing early stage Canadian companies. He’s been the midwife of many a Canadian public start-up, and understands, better than most, the challenges that early stage companies have when they try to raise capital.

Announce a merger, and the world thinks you are merging, naturally. If that’s not actually the case, then the TSX’s task of gaining political support may well be simplified. If they can do a better job on the messaging front.

Part of the TSX’s challenge is that it is impossible to explain to Canadians why this deal is good for us. I found the “improved access to capital argument” easy to debunk, and the apparent loss of control to our own capital market gateway makes the deal a bit dead-on-arrival. The rights of shareholders get trumped when the investment is a regulated utility, oligarchy or Provincially-owned mine: just ask BMO, RBC or Potash.

Sadly, the LSE/TSX debate quickly slid into jingoistic territory. I have no concerns about Qatar or UAE being large shareholders post-deal. Each nation could buy a 9% or 15% stake in the TSX today, I believe, for investment purposes. So why is Ontario Finance Minister Dwight Duncan even observing on that point? If Medal of Freedom Nominee Warren Buffett were the controlling shareholder post-close, would the LSE/TSX deal be more palatable? I don’t think so.

However, all is not lost if you’re a TSX shareholder. If a regulatory mashup between Canada and the U.K. is off the table (see prior post “Will TSX adopt these strange LSE rules?” Feb 12-11), that “just” leaves the question of the strategic importance of Canada’s stock exchanges to resolve.

Here’s a suggestion on that: the TSX might be well-served to draft a Memorandum of Understanding with its stakeholders. The MOU would outline all of the key public concerns and the appropriate fixes. Here’s a quick crack at that list (in no order of priority):

– Canadians will continue to hold X% of senior LSE/TSX executive roles;
– Canadians will continue to hold X% of LSE/TSX board seats;
– the actual annual costs of listing on the TSX exchange will drop post merger, for the first five years at least (why not share some of the synergies with your clients?);
– there will be no degradation in the regulatory oversight or transparency of the exchange (as in, we won’t become like the AIM, and we won’t give up our quarterly financial reporting cycle);
– the TSX will continue to spend $x on promotion of its activities via the dozens of annual initiatives and events it currently supports in the community;
– the LSE and the UK Regulators will utilize a MJDS system similar to Canada and the USA, so that cross-exchange and cross-border offerings will be doable and affordable for TSX-listed companies;
– the LSE and UK Regulators won’t require a TSX-listed company to add a 2nd set of UK lawyers and accountants if it wants to cross-list on the LSE. A few years ago, the March Networks CFO said that a dual TSX/AIM listing more than doubled its annual public company costs. How does that help a Canadian company access the global capital market post merger?
– the “entry level” bar for companies seeking to join the TSX won’t increase under the new ownership regime;
– etc.

How does one ensure this MOU sticks? The Ontario government can require that a “golden share” be issued in exchange for its consent. Like any Golden Share (think Petro-Canada), it is harmless, non-dilutive and non-voting; but it could have the power, say, to require the de-merger of the TSX from the LSE should the MOU not be upheld down the road. That Golden Share would be important, and political gold, since we’ve seen that the Investment Canada Act did little to enforce U.S. Steel’s compliance with post-merger employment undertakings following its acquisition of Stelco (see prior post “Letter of Credit would solve hollow ‘Net Benefit’ rule” Oct 2-2010). Industry Minister Tony Clement would find this MOU approach worthy of consideration when he sits down to deal with the “Net Benefit” question.

Obviously, the case has yet to be made that the LSE/TSX merger is a plus for the Canadian capital markets. The first step is to remove the real and perceived negatives, which should come via better communications. The second step is to craft a lasting and enforceable agreement that puts some meat on the bones of the argument that this is somehow good for Canada.

The deal is a long way from being done, but it’s not dead, either.

MRM