Tokyo, Osaka exchanges to merge

Story highlights

  • Tokyo Stock Exchange will merge with the Osaka Securities Exchange, its domestic rival
  • TSE is the operator of Japan's largest share-trading platform, and the largest in Asia
  • Bolsters the TSE's position as the third largest in the world by market capitalization
Tokyo Stock Exchange, operator of Japan's largest share-trading platform, will merge with the Osaka Securities Exchange, its domestic rival, creating Japan's largest exchange group and bolstering the TSE's position as the third largest in the world by market capitalisation of company listings.
The proposed combination, expected to be completed by January 2013, was described by the pair as "a step towards the revitalisation of the Japanese economy".
The combined value of stocks listed on the exchanges would be about $3,600bn, trailing transatlantic exchanges operators NYSE Euronext at $12,000bn and Nasdaq OMX Group at nearly $4,000bn, based on data at the end of October.
Japan's two largest exchanges had come under pressure to consolidate as global rivals develop into venues that offer both trading in equities and derivatives. The country, for so long the undisputed largest and most liquid capital market in Asia, faces a long-term threat from China and its maturing exchanges.
In a complicated series of transactions, the unlisted Tokyo bourse will first take a majority stake in the listed Osaka exchange in a public tender offer worth Y480,000 per share, or Y130bn ($1.7bn). That represents a 14 per cent premium to the last price before trading in the target's shares was halted on Tuesday morning. Starting from autumn 2012, the two companies will be merged at a ratio valuing the TSE at about 1.7 times the OSE.
The combined holding company, tentatively named the Japan Exchange Group, will have four separate businesses operating a cash equity market, a derivatives market, a regulatory unit and a clearing company. Atsushi Saito, TSE president and chief executive, will serve as CEO of the new entity, to be headquartered in Tokyo. Michio Yoneda, OSE president and chief executive, is to be chief operating officer.
"This is a rational response to an evolving competitive environment," said Neil Katkov, a Tokyo-based financial consultant at Celent, noting that alternative equity trading platforms such as Chi-X Japan and SBI Japannext are claiming an increasing share of trading in Nikkei 225 stocks. "Secondly, it is about trying to prime the pump, to get more offerings and trading going in Japan."
Japanese equity markets have been left standing by regional rivals. Ten years ago, Tokyo was the world's fifth most popular venue by funds raised in initial public offerings, according to Dealogic. So far this year it ranks 40th. Shenzhen and Shanghai, both outside the top 50 a decade ago, are fourth and fifth respectively this year, with a combined $26bn in initial public offering funds raised. Just 12 foreign companies remain listed in Tokyo, from a peak of 127 in 1991.
The pair appear a good fit on paper. The bulk of the TSE's revenues come from share trading, while Osaka's are dominated by revenues from the widely traded futures contract tied to the benchmark Nikkei index. Even so, there is significant overlap in operations and technology. Proposed cost synergies of Y7bn a year amount to about one-eighth of the companies' combined cost bases in the year to March 2011.
"This is not a big-bang moment for Japan Inc, but it is generally a positive, as these are two complementary businesses which will benefit from the ability to scale their operations," Simon Roué, a banker at Deutsche Bank in Tokyo, said. "The real test will be in how well they execute their plans in putting the two together."