Source: The Wall Street Journal Asia                Date: 27 October, 2010

Afraid of losing its relevance, Singapore Exchange is offering to pay $8.3 billion for its Australian counterpart, ASX. Not only an expensive proposition, it's one that might not even work. True, the bid offers SGX access to Australia's USD1-trillion pool of pension funds, and a product offering built around more than 2,000 listed stocks. Among these are the world's largest mining companies. It comes as Singapore finds its Asian ambitions hemmed in by rivals to the north. In terms of generating new listings it has lagged far behind Hong Kong, Asia's favored destination for IPOs this year.

The Singapore exchange would be helped by access to a much larger pool of capital and the ability to attract resource companies by pointing to a portfolio of their peers. But even with USD1.9 trillion in listed market capitalization, SGX-ASX won't be as big—or as direct a play on China—as Hong Kong.

SGX shareholders, meanwhile, will wind up owning a less-profitable company. The value of trading on ASX, at about USD5.4 billion per day on average, is triple that in Singapore, but the Australian exchange generated only 20% more income than its Singaporean counterpart in the year through June.

Things will get worse as ASX loses its monopoly and a rival electronic trading platform, Chi-X, launches its operations in Australia. Where Chi-X is already operating it has quickly taken business away from rivals. Early this year, Chi-X Europe became the second-largest trading venue in Europe by market value traded.

ASX shareholders, who will own about 36% of the combined company, have a unique complaint to add to this. True, Singapore is offering them a price they haven't seen in nearly three years—USD47.11 in cash and stock—but it's doing so in part because of the inflated value of its stock. A sharp rise in SGX shares in the past two months has the stock trading some 20% above its average price-to-expected-earnings valuation over the past five years.

Meanwhile, cost savings for the combined company are already looking less compelling. The exchanges will continue to operate as separate businesses, in an effort to appease Australian regulators who won't like the idea of letting the ASX's clearing operations—essential to trading in stocks, bonds, futures and options—wind up under foreign oversight.

That's not the only regulatory hurdle. With a slim grip on power in Canberra, Australia's government might find the idea of rewriting laws on foreign ownership of a critical piece of infrastructure unpalatable. A questionable offer lacking business sense and political will, this proposed takeover offers investors much to complain about.