Stock Exchange takeover defies logic
Stockbroker Ian Waddell outlines his reasons why Australia should not take over the New Zealand Stock Exchange.
Tuesday, December 19th 2000, 11:51PM
by Ian Waddell
Whenever a politician flies a kite about snuggling up to Australia, there are howls of indignation from the public. It’s surprising then that the approving noises being made by Labour Party leaders to the proposed takeover of the New Zealand stock exchange by the Australian stock exchange has been received with barely a murmur.
Seemingly the tide of globalisation has swamped our mindset to the extent that politicians and the general public take for granted that a stock exchange as small as ours can no longer be a viable entity.
We are indeed a minnow in the world of capital markets. But that is about where the logic stops among those who believe that merging, or more correctly, being taken over by another minnow, will change everything for the better.
It is vitally important for New Zealanders to understand that the sale of the exchange is not an esoteric subject to be discussed at the dining tables of the Wellington and Northern clubs. It is, as investment analyst Brian Gaynor wrote recently, an issue of public interest that will have big implications for the economy.
If the proposal proceeds, New Zealand will be the first country to sell its stock exchange. It will be surrendering a big slice of its economic destiny for dubious returns. This at a time when politicians of all persuasions are pontificating about the need for New Zealand to build on the knowledge economy to safeguard our economic sovereignty.
If the takeover goes ahead – it is estimated that approximately 300 jobs will be lost in the financial services sector. The immediate fiscal effect for the Government is approximately $15-40 million in lost taxes, with a further effect a glut of commercial and residential property on the market in Auckland and Wellington. It may seem inconsequential, but restaurant and cafe businesses in the two cities would also suffer.
Surviving businesses will face higher costs. Larger New Zealand broking firms will have to foot the bill for a systems upgrade costing A$500,000 a year. Smaller brokers working through a bureau will find their costs rising from NZ$10 per transaction to A$50.
None of this appears to be consistent with Government policy, and the Economic Development Minister’s vision, for growing the developing the business base.
People who have been openly in favour of the takeover include Helen Clark, Michael Cullen, Paul Swain and the Board of the NZSE. This group seems intent on making New Zealand the largest retirement village in the world.
If you want to get a feel for what New Zealand could look like, visit Adelaide, a city of similar size to Auckland. In Adelaide, 40% of the population is over 55 and the per capita income is $200 per week less than Auckland.
If the politicians and the NZSE are to convince us that merging or selling the exchange is a good idea, they need to come up with some solid evidence. Specifically, they need to:
- Tell us how a takeover will enhance GDP growth of New Zealand and how it will benefit New Zealand.
- Tell us how losing at least 300 jobs is good for the New Zealand economy
- Tell us how it helps small and mid-cap stocks
- Tell us how it will enhance more New Zealand companies being listed as publicly traded companies
- Assure us that the cost of listing new companies won’t rise
- Assure us that compliance costs for public companies won’t rise.
Space doesn’t allow me to cover all these areas, but I want to touch on one in particular – the effect that a sale would have on our mid-cap stocks. The principal justification for a takeover, beyond unthinkingly accepting that globalisation makes it impossible for us to operate our own stock exchange, is the possible movement to Australia of some of our leading stocks.
The prevailing view is that such a move would mortally wound our exchange. But as Brian Gaynor has argued, the loss of companies to the ASX is inevitable in the global age. The migrating companies are likely to be replaced by smaller, growth oriented companies who will benefit more from a New Zealand exchange than from the ASX.
If the Stock Exchange merges or is sold to the ASX, I believe we will see international orders handled through Sydney. New Zealand brokerage houses won’t generate sufficient revenues to be able to justify having research analysts. For our mid-cap stocks, this would be disastrous, as the valuation of the company tends to fall when analysts do not cover the stocks. This would make the mid-cap and small companies very vulnerable to take-over at a cheap price.
In my view, in the first nine months of this year, control of two New Zealand companies has changed because analysts and brokerages weren’t researching or promoting the true worth of the companies. The two examples that spring to mind are CanWest’s bid for RadioWorks and the Guinness Peat/FR Partners’ bid for ENZA.
RadioWorks was, and is, a great growth story and a company that compared with US radio stations is undervalued by about $3-5 per share. But because there were only about eight million shares on issue, the stock tended to trade by appointment. There was therefore little return for a brokerage house covering the stock.
ENZA is a near monopoly business for marketing our apples offshore, but the shareholders of ENZA were a group of struggling orchardists who had two or three years of bad prices on the international market. Basically ENZA is a solid business with strong prospects.
It was listed on the unlisted board of the NZSE and traded infrequently. The raid by Guinness Peat and FR Partners was at a substantial premium to where it had been trading and appeared quite reasonable. Subsequent to Guinness Peat and FR Partners effectively taking control of the company with their 40% holding at $1.65, I have heard valuations of $4 mentioned. Those who sold have lost that value probably forever.
I believe these two examples highlight the problems mid-cap and small-cap stocks face from not having analysts and brokerage houses covering them. The solution for management and the boards of these companies may be that they will have to pay analysts and brokerage houses to cover their stock. Again – more cost for these companies.
One question that is seldom answered with the seriousness it deserves is this: has the New Zealand Stock Exchange and Stock Market performed that badly?
Well, not according to Eion Edgar, outgoing chairman. In his address to the members at the AGM, he highlighted how well the NZSE40 and the NZ Small Companies Index has done from 1 January 1991 to 30 June 2000. In fact, the NZSE40 Gross Index over that period was up a compounded 11% per annum and the compound rate of return for the NZ Small Companies Index over the same period was up 21%.
We’ve seen daily turnover on the NZSE increase dramatically through the 90s from the low of $14 million a day in 1990 to this year’s current daily turnover average of $111 million to the end of September. This is an eightfold increase. It doesn’t seem like a business in decline or a business without opportunities.
At the end of the day, you’re left with that old adage, "if it ain’t broke, why fix it?" That’s a question all New Zealanders need to ask of their politicians.
Ian Waddell is a member of New Zealand Stock Exchange. He is not a member of any political party, nor has he made a donation to any political party. He has no connection to the Business Roundtable and to his knowledge, has never met Roger Kerr.
Ian Waddell is a member of the New Zealand Stock Exchange.
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