Much Nationalist Ado About Nothing

Another proposed merger is once again sparking nationalist anxieties about the supposed hollowing out of Canadian business. Several months ago, it was the prospect of Potash being taken over by BHP Billiton. Now it’s a potential merger between the London Stock Exchange (LSE) and the TMX Group. The latter operates the Toronto Stock Exchange, where the shares of Canada’s biggest companies are traded, as well as the Montreal Exchange, which specializes in the trading of derivatives.

Under the terms of the merger, shareholders of the LSE would end up owning a slight majority of the combined entity. But exchange facilities would be located not just in London but would remain operational in Canada. The latter makes sense inasmuch as the premise of the deal is to create a global powerhouse in resource stock trading. This can only be realized optimally if a presence is maintained in Toronto, which happens to be nearer than London is to the Canadian mining companies that the newly combined exchange will want to keep and further attract. Envisioned under the deal, too, is that Montreal would continue to be a hub for derivatives trading. Calgary and Vancouver would also serve as headquarters for energy and small-cap stock trading, respectively.

While not a single economic objection can be plausibly raised against the projected transaction, that hasn’t stopped a few politicians from playing the patriotism card. Since the plan is to continue operating an exchange infrastructure in Canada, the hollowing out charge has little merit. So all that sceptics can do is insist that the deal would hurt our national pride. Or, they can stir up fears that our financial markets might come under the influence of a foreign power able to compromise our domestic interests. This was the gambit adopted by Ontario Finance Minister Dwight Duncan. After discovering that a Dubai sovereign wealth fund currently owns the largest stake of LSE shares, Mr. Duncan wondered whether it was a good idea for an organization connected to a Middle East government to own part of Canada’s most important financial marketplace.

Up to now, no one has seriously referred to Canada’s financial markets as a source of national pride. So it is dubious to suddenly claim that domestic ownership of an exchange belongs in the same category as, say, the performance of Canada’s national hockey teams in international tournaments. As for the Dubai fund, it owns 20% of the LSE, but that percentage will come down closer to 10% of the combined entity. What’s more, fund officials have expressed reservations about the proposed merger. This doesn’t sound like a group which is aiming to harm Canada’s security interests.

We’d do well to remember the economic functions that equity exchanges serve. They provide a secondary market for the trading of corporate shares. That is, they permit investors to readily sell their ownership position at a reasonable price to other investors. In thus providing liquidity, stock exchanges make it easier, and cheaper, for corporations to obtain financing from the investing public. As a result, more capital projects get started, which in turn conduces to the raising of labour productivity and greater economic growth. By globally enhancing both the breadth and the depth of the secondary markets for resource stocks, the proposed LSE/TMX only adds to these benefits.

Tony Clement, the Industry Minister, has a chance to at least partially redeem himself for the capital error he committed in rejecting BHP Billiton’s takeover bid for Potash. He should approve the LSE/TMX deal immediately and encourage provincial securities regulators in Ontario and Quebec to do the same – needless to say, it’d be even better if such deals didn’t have to undergo these sorts of government reviews. But that is a blog entry for another day.

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