December 2000
As you will be aware, the Board of the NZSE is proposing a merger with the Australian Stock Exchange.
A group of concerned New Zealanders are joining together to fight this proposal because of our concern that such a
takeover will hurt New Zealand and New Zealanders in the long term.
We are concerned that the takeover will mean New Zealanders will lose sovereignty over a core component of our capital
market
We believe a takeover will result in sharply increased exchange and compliance costs and significantly fewer
opportunities for New Zealand based companies, particularly those medium and small companies who are vital to job
growth.
The takeover will also exacerbate the brain drain as corporate offices and financial services move to Australia. This
will also have a flow on effect for all professional services.
Please join the “Stop the Takeover Campaign” and help fight to retain New Zealand’s economic sovereignty, jobs and
business infrastructure.
Fill in the following form right away and email it back to us or print off the attached form, fill it in and fax it back
to 04-473-0371.
Thank you for your support
Ian Waddell
Member of the New Zealand Stock Exchange
“STOP THE TAKEOVER CAMPAIGN”
The proposed takeover of the New Zealand
Stock Exchange by the Australian Stock Exchange is not good for New Zealand or New Zealanders.
We will lose sovereignty over a core component of our capital markets;
There will be much higher exchange and compliance costs and fewer opportunities for New Zealand based companies,
particularly those small and medium companies that are so vital to job growth;
We will see more brain drain as corporate offices and financial services move to Australia and this will have flow-on
effects for all professional services;
Please join the “Stop the Takeover Campaign” and help fight to retain New Zealand’s economic sovereignty and business
infrastructure.
Fill in this form and fax it to 04-473-0371
Name:--------- ______________________________________
Position/ Title: ______________________________________
Company: ______________________________________
Work phone: ______________________________________
Mobile: ______________________________________
Email address: Please put me on the email list for information and ways to help “Stop the Takeover Campaign”
I would like to make a donation. please make cheques payable to “Stop the Takeover Campaign”, c/o PO Box 9830,
Wellington
I would like to suggest someone else who might be interested in joining the “Stop the Takeover Campaign”
--------________________--------
This Campaign is a grassroots organisation and is not aligned
to any political party or vested interests
The Risks of a Takeover
The NZSE will lose sovereignty over the governance of New Zealand listed companies and a core component of our capital
markets;
The sovereignty of the NZSE is more important than many people are recognising. It is an issue that will impact longer
term on far more people than the sharebrokers who are predominantly giving consideration to the issue at present. New
Zealanders should be considering whether the Exchange, like our legal system, is an integral part of our economic system
and is an institution which reflects our capital markets.
Higher exchange costs and lower efficiency for New Zealand based companies;
Higher compliance costs;
Loss of corporate offices and financial services;
We believe that a natural consequence of the takeover will be that Sydney will become increasingly attractive as a base
for head offices of New Zealand companies. New Zealand cannot afford to lose existing head offices or local
entrepreneurs.
Capital raisers, capital aggregators and providers, support professionals including stockbrokers, corporate finance
advisers, corporate lawyers and accountants, will focus on Sydney/Melbourne with a major loss of creative talent from
New Zealand. Maligned as this sector is, it has historically employed many of New Zealand’s most creative and
intelligent people – many of whom are today responsible for the emergence of a growing, albeit still fledgling, creative
technology sector.
Australia is not our natural partner.
Australia might be closer to New Zealand geographically, but there is insufficient substance in Australia’s financial
system or capital markets to improve New Zealand’s position.
Australia has proved a weak market for New Zealand companies in terms of capital support. While all flows are currently
weak, during periods of strength NZSE listed companies have primarily garnered support from the US and Europe first and
then from Asia. Australian capital market players have never been much more than patronising in their commitment to the
success of New Zealand companies.
Background Information on the New Zealand Stock Exchange:
Who Owns the New Zealand Stock Exchange?
The membership of the New Zealand Stock Exchange, numbering approximately 279, owns the New Zealand Stock Exchange.
What is the New Zealand Stock Exchange for?
The New Zealand Stock Exchange is the national corporate body that represents its stockbroker Members. As noted
in the NZSE Annual Report 1998:
The purpose of the Exchange is to provide and operate an efficient market for the raising of capital for listed
companies and the trading of securities, including shares and fixed interest securities such as bonds and Government
stock. It is also responsible for maintaining professional standards among its members and among listed companies.
Its objectives are to:
Actively work for the provision of a fair, efficient and fully informed market
from the raising of capital and the exchange of securities
Educate investors and the public about the role and operation of the market
Provide market transactions at efficient and cost effective rates
Operate as a business which provides an example to the business community
Eliminate the risk of loss in the process of exchange (as separate from the risk
of ownership of a traded item)
Achieve returns which cover the cost of any capital involved
Maintain the New Zealand Stock Exchange as an independent entity
It is interesting to note that one of the stated objectives is that the Exchange “Maintain the New Zealand Stock
Exchange as an independent entity”.
What is the New Zealand Stock Exchange worth?
Currently the New Zealand Stock Exchange has shareholders’ funds of approximately $6 million.
Continuing to trade in its current format the NZSE is worth approximately $8 million or 8x earnings. This equates to
about $28,000 per Member. A figure of $200,000 per Member has been mentioned in the press and may be possible to achieve
if the structure of the Exchange is changed. The effect of this will be that profitability will have to increase
dramatically. That profit increase can only come from increasing the charges paid by companies listed on the Exchange,
by charging Members and member firms more to belong or by charging customers who trade through the Exchange further fees
for each transaction.
What reasons for the takeover were put forward by the Board of the NZSE?
The overriding reason for merging or selling the NZSE was that the big companies in the NZSE that Jon Cimino had
spoken to were going to move their primary listing to the Australian Stock Exchange anyway, and if we didn’t move
quickly to merge or sell, it would happen anyway.
They also said the liquidity in stocks would improve, that the cost of capital would reduce and that the valuation of
stocks would improve when compared with their peers in the ASX.
Who are the major companies that the NZSE Board said were going to change their primary listing to the ASX, and what
is their logic?
Jon Cimino, a former director of the NZSE board who has done an investigation on the proposed takeover, would not reveal
who these companies were in a similar way that he wouldn’t reveal which institutions he had spoken to. Supposing he has
spoken to Telecom and Carter Holt, why would they consider changing their primary listing? Let us discuss the issues
they have to consider. What would the disadvantages be?
As the bulk of their earnings are in New Zealand, they would have no tax benefits.
They would hurt their New Zealand shareholders by not being able to offer imputed dividends.
The New Zealand Government may not be able to enforce the “Kiwi Share”.
Their weighting in the New Zealand index may change significantly, may even go to zero over time. An example of this
was Goodman Fielder.
In New Zealand we have many indexes, the NZSE 40, NZSE 10, NZSE 30, MSCI NZ Index, FTSE New Zealand Index and Ord
Minnett Russell Index. These indexes are used as benchmarks by active managers and are replicated by many passive
managers. Telecom and Carter Holt are the two biggest stocks in most of these indexes. Telecom’s rating can vary between
24% and 44% and Carter Holt’s between 4.3% and 11%.
Passive interest in New Zealand represents at least $2 billion. These indexes are incredibly important to our market and
the liquidity of the market. Changes to these indexes can create enormous liquidity and real pressure on stock prices if
stock is removed from the indexes.
If Telecom changed their primary listing and went out of the indexes then you could see $500 million to $900 million
worth of Telecom stock being sold within a short space of time. With a daily turnover of three million shares if $500
million of stock had to be sold it could take thirty days.
December 2000
Stock Exchange takeover defies logic
Editorial Article by Ian Waddell, member of New Zealand Stock Exchange
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 café 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 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.