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Tokyo, Osaka merger creates world's No. 3 exchange

Employees of the Tokyo Stock Exchange work at the bourse in Tokyo in this March 10, 2011 file photo.

Toru Hanai/Reuters/Toru Hanai/Reuters

The Tokyo and Osaka stock exchanges agreed on Tuesday to merge in 2013 to create the world's third-biggest bourse with listed stocks worth some $3.6-trillion, hoping to build scale to compete with a flurry of other global tie-ups.

The $4.1-billion union between Tokyo Stock Exchange (TSE) and Osaka Securities Exchange Co. Ltd. (OSE) caps months of talks and brings together complementary strengths.

Tokyo controls 90 per cent of cash equity trading and Osaka draws the top volumes in Nikkei index futures and other derivatives.

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The combined value of stocks listed on the exchanges would trail only NYSE Euronext at $12-trillion and Nasdaq OMX Group Inc at nearly $4-trillion, figures from the World Federation of Exchanges show.

Still, the new exchange lacks a convincing international strategy, seen as an important factor for growth since its home market is mired in deflation and has suffered years of economic stagnation.

Globally, exchanges have announced $83-billion of mergers and acquisitions over the past five years, as bourses rushed to cut costs and diversify in the face of dwindling revenues from the traditional stock trading business and new upstarts.

"The TSE is strong in cash equities and the OSE in derivatives. This will create a well balanced exchange," said Sadakazu Osaki, a senior researcher and exchange expert at Nomura Research Institute.

"Competition among exchanges globally is also tough and they needed to take action to become more competitive."

The two said they would merge operations in 2013 after the larger but unlisted Tokyo bourse buys up to two-thirds of the listed Osaka exchange in a public tender offer. The tentative name for the merged entity is Japan Exchange Group Inc.

The TSE will offer 480,000 yen per share, or a 14 per cent premium to Monday's closing share price.

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Shares of OSE, where companies such as Nintendo Co. Ltd. and Murata Manufacturing are listed, rose as high as 5.5 per cent before closing up 4.6 per cent.

The OSE will keep its listing as the surviving entity.

The merger ratio values the TSE at roughly 1.7 times the OSE, which has a market capitalization of 118 billion yen ($1.5-billion). That implies a combined market value of about 319 billion yen ($4.14-billion), which would rank 10th globally, just a head of the London Stock Exchange.

Based on combined profits of the business year ended in March, the Japan exchange would trade at about 18 times past earnings, higher than NYSE Euronext at 11 times but below top operator Hong Kong Exchanges and Clearing Ltd. at 24 times.

Atsushi Saito, chief of the TSE is due to become chief executive of the new exchange, while OSE head Michio Yoneda will assume the post of chief operating officer.

Asian stock exchanges have largely stayed out of this year's global exchange consolidation and the only attempted deal – the $8-billion bid by the Australian stock exchange ASX Ltd. to buy Singapore stock exchange SGX Ltd. – was blocked by the Australian government.

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Talks between the TSE and OSE started in March and hit several snags as the two sides struggled to agree on the merger ratio and the structure of the deal, with the TSE originally aiming to list its own shares before merging.

The deal was struck against an increasingly dismal outlook for the Japanese equities market. While new listing have recently picked up slightly, trading volumes are at half of 2007 levels and slumped to a new low for the year last month.

The Japan exchange cited global exchange consolidation as a driving force behind the decision to join forces.

"For a Japanese stock exchange to survive such global competition as a player, it must establish a highly liquid and efficient market and enhance the convenience of investors and companies," the TSE and OSE said in a release.

The merger is seen by some as an important measure to strengthen Japan's markets. The government has long worried about Tokyo's declining importance as a financial hub compared with fast-rising markets in Shanghai and Singapore.

Japanese Banking Minister Shozaburo Jimi said earlier on Tuesday that the merger would be a positive step towards the establishment of one exchange combining securities and commodities, an idea being pushed by some in the government.

At the peak of Japan's asset bubble in 1989, the Tokyo exchange's market capitalization accounted for about 40 per cent of the value of global markets. It now contributes just a few per cent, reflecting Japan's loss of economic might.

The TSE's $140-million investment to introduce a high-speed trading system in 2010 was seen as a way to invite more hedge funds and high-frequency trading to Japan, but that has had little positive impact on volumes.

While combining forces should help the exchanges drum up new listings and streamline certain operations like regulatory oversight, it would not do much to address the fundamental issue of trading activity, Nomura Research's Mr. Osaki said.

"I don't think we should expect this merger to lead to a sharp increase in turnover on the exchange," he said.

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