Let's talk about the NAMEX

TSX / LSE Merger Part 12

Now that the cat is out of the bag (see prior post “LSE has plans for NASDAQ next?” Mar 6-11), perhaps Canadians should ask ourselves the simple question: what’s the best platform for Canada’s entrepreneurs to raise capital?

For countless decades, the TSX has been the answer for most. At times, the NASDAQ or NYSE has served that purpose, depending on how large your market cap is. Calgary-based SMART Technologies’ US$660MM IPO is an example of a NASDAQ deal, and was noteable for being the second largest IPO on a U.S. exchange in the first 7 months of 2010.

And that’s how it is if you are one of Canada’s largest privately-held tech players. Lead underwriters Morgan Stanley, Deutsche Bank Securities and RBC Capital Markets fly to Calgary to pitch you. Whether your stock is sold in New York, London or Singapore, they’re happy to do it. You, at that point, just have to worry about making your forecast.

And, as every Canadian investment bank will tell you, things had better go perfectly when you’re launching your career on the public market’s version of the stage of Carnegie Hall. Stumble once, and you stock will be cut in half. That’s how it is when there are 12,000 domestic stocks to buy and trouble arises: U.S. investors are known to sometimes sell first, and ask questions later.

But that doesn’t mean it isn’t a natural place to market your shares. Canadian and US regulators already welcome each other’s work. US private equity players and VCs have lots of experience north of the border. And U.S. institutions already make up ~40% of the daily trade flow on many a Toronto institutional sales desk. There’s also the Free Trade Agreement, dollar parity, a shared approach to continental security, etc., etc.

Rotman Business School’s Dean, Dr. Roger Martin, had this to say at the Select Committee last week:

“I think it would be a horrible mistake to attempt to keep this Canadian owned for the sake of Canadian ownership. I’d think you won’t have a TMX of any consequence in 15 years from now if that were the case.”

I’ve not seen any academic research on the issue of the LSE and TSX getting together, but I’ll assume the point is more general (ie. globalization is happening) than specific. In my presentation, I didn’t advocate for Canadian ownership purely for ownership’s sake (see prior post “Media Coverage” March 3-11). The point is not falling for the pot-of-gold at the other end of the rainbow argument (aka “improving our access to capital via an exchange merger”).

Since I was involved in the capital markets 15 years ago, I can attest that little has changed on Bay Street regarding how and where most Canadian companies raise dough. In many ways, the TSX is a far stronger market 15 years later. But, in the off-chance that an exchange merger is required to avoid “being left behind”, perhaps we should consider creating a “North American Exchange”; NAMEX for short.

Whether our partner is the NYSE/AMEX or NASDAQ/OEM isn’t important. Facing reality is what’s key. Our capital markets’ economy is North-South, not East-West, or West-East. And no merger is going to change that for the forseeable future.

There’s the sticky issue of Sarbanes/Oxley and Dodd/Frank, of course, and the natural fear of playing second fiddle. But that hasn’t held Bay Street back to date: Manulife acquired John Hancock, RBC is making a big push into the US investment banking industry, 1/3rd of BMO’s assets are in the USA, and TD Bank also has a large customer base there — before acquiring Chrysler Financial last year, and on the list goes….

If the TSX is already home to the world’s resource industry, and the NASDAQ or AMEX is the goal for globally-minded Innovation entrepreneurs, whether they be from Calgary or Tel Aviv, how exactly does the LSE fit into the equation?

I’m not necessarily advocating for a new merger partner. But let’s at least understand our options, and what market form would truly improve our access to capital, before the LSE/TSX finds itself merging with the NASDAQ for its own corporate purposes.

MRM