A comment from the Korean Stock Exchange that it plans to invest in other markets around the region might sound interesting at first. Afterall, there is nothing like interest from a potential investor to drive a stock price higher. But it's curious that the Korea Exchange should even be contemplating such a move. A cross-trading deal with the Singapore Exchange is expected to be announced this month, reports the Wall Street Journal. So why bother making an investment or even merging? It makes no sense to me.
Let's be honest: stock exchanges are like any other business. They apply their technology to provide services to customers for a fee. There may be some benefit in consolidating the back-office in order to save costs, but only if the technology platforms used by the organisations are the same or similar. Perhaps they can save costs by consolidating human resources, finance and other functions. But even then, is that really feasible when working across offices separated by different work cultures and timezones? And anyway, even if they could bridge those gaps, would these synergies be enough to warrant a merger? There is the lure of exposing companies currently listed on your market to the traders and investors in the market you are merging with – but even then, most retail investors buy stocks in the market in which they live (we have done some very interesting research about this), and institutional investors usually engage a broker who can buy and sell shares on their behalf, no matter where those shares a listed. A trading linkage is at best sufficient, at worst superfluous.
Remember the SGX's trading link with the ASX? What a golden opportunity wasted (please see my earlier blog about this). But it proves that in order to attract investors in the other market, you need a lot more than just a technical ability to do so. There must be a concerted marketing effort to ensure it's actually used.
If the Korea Exchange was to make an investment in the SGX, it should do so entirely for commercial reasons, and not because it thinks it can get synergies out of a trading link. The SGX is trading at 8x book value and 24x earnings. With a yield of 4.3% it's attractive alright, but not much more attractive than many other possible investments. Hong Kong Exchanges and Clearing is significantly more expensive (13x book, 45x earnings), with a lower yield (1.2%). The Australian Stock Exchange (10x book, 25x earnings, yield 2.5%) isn't much better. Bursa Malaysia doesn't have the size nor sophistication to be really interesting to the Korean Exchange, let alone the right numbers (3.5x book, 35x earnings). So the investors in a newly-demutualised Korea Exchange might wonder whether these multiples are worth paying for. I doubt it.
The Korea Exchange could do worse than invest in the SGX as a company. But if the cultural divide to the Australian market was too wide to bridge, and with people wondering whether an SGX-Bursa link will work, I'd say a merger or workable cross-border link to Korea has the odds stacked against it.