PwC Sees Emerging Markets As The Future Of Stock Exchange M&A
Thursday, August 11, 2011

The emerging markets look set to dominate the exchanges sector, driving transformational change, deal making and merger and acquisitions activity, according to a new report by PwC.

The report, "Trading blocs – what next for the stock exchanges?" shows that the top emerging market exchanges to watch are those in Brazil, Hong Kong, Singapore, Shanghai and the merged Russian exchange. As a result, it is suggested that Western exchanges focus on developing post-trade clearing and settlement capabilities or fostering ties with emerging market players, with such tactics seen as the most viable growth options.

In addition, the report stresses that high operating leverage and heightened competition have suppressed margins across the sector and will continue to provide a compelling economic rationale for consolidation. Regulatory changes are seen to have enabled much of the new competition in Europe, with Europe’s Market in Financial Instruments Directive cited in particular, for it allows new entrants with low-cost business models to seize market share.

Consolidation trends are likely to be seen in Asia and Latin America, according to Shamshad Ali, partner at PwC. Ali said: “Talk of an end to consolidation in the stock exchange sector may be largely true for the more mature Western European markets, but Asia and Latin America are likely to see significant M&A in the future - if regulatory hurdles can be overcome. Over the next five years, significant M&A activity will be driven from the emerging markets as local exchanges seek growth opportunities outside their home markets. As economic growth in the emerging markets continues to outstrip the traditional markets, exchanges in Asia and Latin America have the obvious benefit of being positioned within the heart of this growth surge.”

Furthermore, PwC states that, in addition to serving local companies, Hong Kong and other leading Asian exchanges have already seen an increasing number of dual-listings from Western corporations keen to access the region’s growing capital bases. The Asia Pacific region has seen significant growth in the value of share trading over the last decade, reporting a 20% rise in values between 2000 and 2010. In comparison, the Americas and EMEA region both saw a decline in values by 14% and 6%, respectively.

Ali added, “The difficulties encountered by bidders in several recent aborted mergers among Western exchanges have led to a number of businesses questioning their next move. Given the shift in global growth and associated capital flows, traditional exchanges cannot afford to ignore the dominant role the emerging markets are likely to play in the future exchanges landscape. They will need to look closely at different models to compete against, or collaborate with, their emerging market counterparts.”

Nonetheless, PwC is clear that, despite strong growth predictions in the Asian region, a number of hurdles to M&A remain. As Asia is not a single market, is does not possess a single regional regulator. This means that it has not developed the cross-border market liberalisation measures that would pave the way for more straightforward cross-border mergers. Local considerations, such as constraints on foreign investment, are also a crucial barrier to further intra-regional consolidation.

Ali concluded, “The big unanswered questions are how many major exchange groups can the markets support and how will regulators respond to increasing concentration in markets, some of which are fundamental to the economic success of the economy.”