Multibillion-dollar mergers are not the only way to bring stock exchanges together.
Many exchanges around the globe are instead connecting through stake sales, partnerships and joint ventures with their overseas peers. The price tags, if there are any, are tiny, but the hope is that these alliances will set the stage for more substantive ventures in the future.
What is unclear is how, exactly, these partnerships will work, or what real benefits they immediately bring—in the short term, they may be little more than photo opportunities, some analysts say. Still, that is not slowing down the handshakes. Earlier this month, the Deutsche Borse agreed to buy 5% of the Bombay Stock Exchange (BSE) for $43 million. In January, the NYSE Group said it would pay $115 million to purchase 5% of the National Stock Exchange in India. The Tokyo Stock Exchange signed a cooperation agreement with the New York Stock Exchange (NYSE) in January and is already talking to the London Stock Exchange about an alliance.
The stock market in Mexico, meanwhile, is embarking on partnerships with the stock exchanges in Sao Paulo, Brazil, and Lima, Peru. Singapore's stock exchange, a rumoured bidder for the BSE stake, is also expected to look elsewhere for small deals, and a start-up in Dubai may look for a partner.
The alliances have little precedent, and are often accompanied by vague promises of cooperation. They are being forged in lieu of bigger deals, because, despite the talk of global consolidation, many countries continue to regard their exchanges as important national assets and thus limit foreign ownership.
For a large, well-capitalized exchange, these deals can be a way to get a toehold in fast-growing emerging markets, and perhaps persuade their largest companies to list overseas. For smaller, very local exchanges, a big partner with international experience can bring greater marketing power, improved technology and usher in more foreign stock buyers. Years from now, they may result in an actual merger.
“These will help global consolidation and integration of capital markets in key geographies,” said Mukarram Bhagat, chief executive and managing partner of ASK Raymond James in Mumbai. “Eventually, the trend seems to be the emergence of four or five large liquidity pools across the world, each servicing the capital needs of a major regional economic bloc.”
Fast change may not happen, though. “In the near term, they're unlikely to have a marked impact on the bottom line,” said Andrew Mitchell, an analyst with Fox-Pitt, Kelton in London. “But they don't cost the exchanges much, and they give them options for the future.” Deutsche Borse's purchase of 5% of BSE “could give them a warmer, fuzzier feeling rather than really making an impact,” said Michael Long, an analyst with Keefe, Bruyette & Woods in London. But in the future, if the BSE “is doing really well, they are in a good position,” he said
Deutsche Borse is looking at “five to 10 years, not a short-term period,” said V.R. Srinivasan, chief executive of Brics Securities in Mumbai. The exchange is not looking for profit right away, he said, but "looking at how this investment can be leveraged."
While BSE has not yet provided concrete details about how it would work with Deutsche Borse, others have been a bit more forthcoming. Tokyo and NYSE, for example, plan to meet regularly to discuss strategy in areas like market data products and technology, and may exchange personnel as well.
Small-scale alliances are going to get more common as stock exchanges around the world convert from private members' clubs to publicly traded entities. Exchanges that may go public in 2007 include the Mexico Stock Exchange, the Montreal Exchange, Sao Paulo's exchange and the Warsaw Stock Exchange.
At the same time, some ambitious start-up exchanges have arrived, such as the Dubai International Financial Exchange. So far DIFX, as it is known, has attracted just a handful of listed companies, but allying with a well-established exchange may be a good way to ensure high trading volume, bankers and analysts say.
DIFX is not ruling out such an alliance. “We're aware of the potential benefits of cooperation with other exchanges, but there is nothing in the works at this time,” Mark Fisher, a DIFX spokesman, said.
Still, there are reasons to be skeptical about the trend. In general, alliances between stock exchanges that stop short of full-fledged mergers “have never worked in the past,” said Lynton Jones, the chairman of Bourse Consult, a consulting firm for stock exchanges.
For example, a 10-exchange alliance that included NYSE, Euronext, Mexico and Australia, called the Global Equity Market, or GEM, was announced with great fanfare in 2000. It petered out within a year.
“For an exchange to change its behavior radically, I suspect it needs to change its ownership completely,” Jones said.
Julia Werdigier in London contributed to this story.