SIMONA ADAM, LAURENŢIU POPA (Translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section / 15 aprilie 2011


A journalistic investigation on the "pros" and "cons" of the merger between the Bucharest Stock Exchange (BVB) and Sibex seems appropriate now, when we are just two weeks away from the general shareholder meetings scheduled on this topic by the two exchanges, on the same day of April 29th.

The supporters of the merger consider that the "Great Union" will benefit the entire food chain: market operators, brokers and their customers.

Nobody discusses the issuers" gains or the macroeconomic benefits. The idea seemed so foreign, that our question - "What consequences do you think the merger of the two exchanges would have on the economy and on the issuers?" - was left unanswered.

It is explicable. The merger won"t provide any benefit to Romania"s economy or to the listed companies.

The opinions in favor of the merger share some common traits, meaning that they could be grouped together by categories: market simplification, lower trading costs, reduced cost of investing in the development of the market, the increase of trading volumes and turnover, getting with the international trend. There are some opinions that stand out as well.

Most opinions focused on the benefits to market operators. The benefits to investors are mentioned to an extent, whereas the benefits to brokerages pertain more to their status of shareholders of the market operators, rather than their position as intermediaries.

The supporters of the merger believe that it will make the two exchanges more competitive in terms of volume, turnover and number of trades, but provided no detail on how the growth process would occur, perhaps relying on the addition of the figures and on the inherent "momentum" specific to the capital market.

I. Market simplification

Two is more complicated than one - an aspect which has been repeatedly emphasized by the supporters of the merger.

Stere Farmache, the president of the BSE, argues that the merger will eliminate some "unnecessary redundancies" - namely the institutions that both exchanges share.

Bogdan Baltazar, financial consultant, noted that, "after the merger, investors and issuers will focus in just one direction, when it comes to trading".

Iulian Panait, the president of the Board of Directors of "KTD Invest", considers that having just one market would simplify things, because having several would require investors to have a higher level of "investment culture".

Răzvan Paşol, president and CEO of "Intercapital Invest", supports the merger, because "the Romanian market is not big enough to justify the existence of two exchanges ".

He considers that one thing that one tangible result of the merger would be the disappearance of the current state of things, where there are two depositories, two platforms, two sets of regulations (Lucian Isac, member on the Board of Directors of the BSE shares the same opinion).

Octavian Molnar, deputy CEO of "IFB Finwest" and member of the Board of Directors of the Exchange, said that the merger would provide investors with easier access to the market for financial instruments and would build a new exchange, which "would be able to impose its own market policy".

II. Cheaper trading

The direct consequence of the simplification of the current market would be the reduction of trading fees.

Eugen Voicu, the president of "Certinvest" said that at the moment, the trading commissions are high on both markets, because of the low trading volume, but if volumes increased after the merger, "cutting the fees would be good".

Stere Farmache said that the merger would help lower the operating costs on the capital market.

Lucian Isac, managing director at "Estinvest" and a member of the Board of Directors of the BVB considers that the merger will cause several cost decreases: the reduction of the administrative expenses of the exchange operators; the drop in trading expenses and implicitly lower costs for pre- and post-trading operations. He said: "We currently have two exchanges, two clearing houses and two depositories, each of them with their specific software, which means expenses which are included in their rates, expenses which are then shifted over to intermediaries, who in turn shift them over to investors".

Octavian Molnar considers that, if both markets had a unified management, it would help reduce the costs to shareholders in the medium term.

III. The streamlining of investment in developing the exchange market

Similar with the process of saving on trading costs, we also have the development and improvement of the market, which would eliminate duplication.

Stere Farmache considers that the new exchange that would result from the merger would offer conditions for better allocation of the capital invested in helping it grow, opinion which is also shared by Lucian Isac.

EDITORS" NOTE: Even though there is a certain truth to the claims that simplification, cost reduction and streamlining support the idea of the merger of the two exchanges, it bears mentioning that these processes will not automatically improve afterwards.

It is obvious that, even if the current employees of the two exchanges weren"t currently overworked (and they are not), the staff which handles the spot market couldn"t handle the additional workload of the derivatives market and vice-versa. Meaning that, at any rate, the merger would bring about an increase in the number of employees, just as the expenses of development and promotion would have to be dedicated to the specificity of each market.

Simplification, cost savings and streamlining would be very easy to implement in some cases, whereas in others, they would be impossible to achieve.

For the latter cases, let"s take the example of a hypothetical need to buy computer software, in which case the cost would remain the same whether or not the two exchanges went ahead with the merger. And so on.

IV. Increased volume and trading value

The merger will bring about the opportunity to merge the operations of the two exchanges - an obvious fact that the supporters of the merger frequently emphasize.

The reports published abroad include the number of trades, their value and their volume. By adding the turnover of Bucharest and that of Sibiu, these indicators would be a lot bigger.

According to Bogdan Baltazar, the advantage of the merger would be the increase in total turnover.

Eugen Voicu reminded that the potential of the exchange could be a lot greater, amid higher liquidity.

Stere Farmache mentioned that the merger would increase the trading volumes.

Lucian Anghel, the chief-economist of BCR considers that size matters to investors, and a large market is a lot more attractive.

V. The "trendy" argument

On an international level, there are already examples of market concentration, with NYSE Euronext being the best known, by which the New-York exchange and the Western European markets combined their forces. Nowadays, the talks concerning the takeover of the aforementioned giant, disputed by NASDAQ-OMX and ICE on one side, and Deutsche Borse, on the other, hold the frontpage of the financial media.

The international phenomenon of concentration is being invoked as the main argument supporting the plan to merge the two domestic exchanges.

Răzvan Paşol considers that "the idea of the merger is good, considering the similar trend of consolidation which currently exists on the international markets. He stated that when talking about international unification, then we can enter the sights of foreign analysts, at least by way of the momentary overlap: "While they have their mergers, we have ours".

VI. Increased competitiveness

A unified exchange will be more competitive than the other exchanges in the region, as a result of the eventual reduction of fees, as well as thanks to the fact that the market instruments available in Romania would be found in the same place.

Răzvan Paşol emphasizes the aspect of eliminating redundancies. According to him, the existence of a single depository, of a single platform and of a single set of regulations would facilitate the process of entering the market and handling assets.

Lucian Isac said that the reduction in trading costs as well as the decrease of pre and post operational expenses will lead to an increase in regional competitiveness.

VII. Benefits for intermediaries

Brokers will be among the main beneficiaries of the merger, as a result of reduced administrative expenses that brokerage firms currently incur.

According to Lucian Isac, the decrease of the market operator"s administrative expenses would benefit brokerages as well, as this would be felt in the reduction of their own administrative expenses.

Octavian Molnar agrees with the idea that the cost reductions resulting from the merger would benefit brokers as well.

VIII. Benefits for customers

Analyst Bogdan Baltazar says the merger would draw the attention of investors to a single place, as all the instruments in the market would be found on a single exchange.

Octavian Molnar said that investors would be able to far more easily access market instruments.

Some of the few voices that proved skeptical to the "Great Union" include Alexandru Elian, the president of "Delta Valori Mobiliare" and Patrick Young, proposed by Teodor Ancuţa as CEO of Sibex.

Alexandru Elian had the following explanation for his skepticism: "Both exchanges first need to solve the problems they have with their internal organization, their instruments and their business, etc., and the merger will not solve these issues".

Patrick Young, said that the merger of Sibex with the BSE would not benefit the domestic capital market. He said: "I don"t think that at this time a merger between Sibiu and Bucharest would be in the interest of the Romanian capital market. Monopolies aren"t good in capitalism".

This is the second time in the last six years that the two exchanges attempt a merger.

Achieving consensus on the idea is a painstaking process that involves emotions, individual interests and pride.

If we examine the arguments in favor of the merger, we find a huge imbalance between the benefits that the merger would bring by allowing the market to grow, and the harm it would do because of the conflicts it would engender, the moves in the market generated by this subject, and the energy and time spent on it by the members of the community.

In the end, it doesn"t look like the merger would lead to a bigger market, or that it would provide a real benefit to issuers and investors.

Yes the merger might be good, except this may only apply to brokers ...

Stere Farmache, the president of the Board of Directors of the BSE

"I am in favor of the merger. This will eliminate some redundancies, such as a large number of duplicate capital market institutions, as well as the low trading volumes. Other benefits of the merger are the reduced operating costs of the capital markets and the improved allocation of the invested equity. Besides, there are benefits for all market participants. Some of these benefits include the streamlining of the operating costs and a better use of the financial and human resources of the industry".

Teodor Ancuţa, the chairman of Sibex

"First of all, the merger requires the agreement of the shareholders of both exchanges. Only after that principle agreement has been obtained can we discuss about the parity between the shares of the two exchanges. I think it would be better if Romania had one major market. But not everybody shares this opinion. I find it very hard to tell whether the BSE truly wants the merger or if it just looking to halt the rise of Sibex. It is very important to clearly determine the answer to that question. This merger shouldn"t simply be a hurdle to the development of the Sibiu exchange. We want the market to grow, and for it to be helped to do so, not to have it held back. The BSE handles the spot market, and we handle the derivatives. That"s how it used to be, but while we were discussing the merger, the BSE sent its people to a futures training, and then launched futures trading.

Then we opened our own spot market. Aside from the value of Sibex, we can also take into account the money spent on licenses. A lot of money was already spent, by our shareholders. I want the merger, but when I"m talking to them, my shareholders tell me that they had to spend their own money to make this kind of investments (and let"s not forget the rebranding), money which could have been used for something else. The issuers and the investors will have the benefit of a single market. If the merger doesn"t get accomplished, if we want to know what that will lead to we can look at Taiwan, where there are two exchanges that aren"t stepping on each other"s toes. One handles the spot market and the other handles the derivatives, and the market is doing great".

Lucian Isac, managing director of "Estinvest" and member of the Board of Directors of the BSE

"I can"t help but wonder why in Romania, where the market is still small, we have two exchange operators that, minor differences aside, work with the same brokerages, and even share some of the shareholders, and actually have the same line of business (spot and futures, both of them). The benefits of the merger include:

the decrease of the administrative expenses of the exchange operators; the reduction of the trading expenses and therefore cheaper pre- and post-trading operations (right now we have two exchanges, two clearing houses and two depositories, each having their own software and their own operating expenses, which are included in the fees they charge, which are then shifted over to the intermediaries, which in turn shift them over to the investors); the reduction of the administrative expenses of the brokerage firms; the increase of the market operator"s ability to handle increased competition in the region and, by consolidating the other entities (depositories and clearing houses), would provide the possibility of creating the institutions that the Romanian capital market doesn"t currently have and I am referring here to a Central Counterparty (CCP). The shareholders of the two entities would only have to gain, because the operating costs would shrink considerably and this would lead to an improved allocation of resources. It"s premature to discuss the exchange ratio - the parity between the stocks of the two exchanges. The General Extraordinary Shareholder Meeting of April 29th/April 30th is only supposed to approve the principle of the merger, and if both companies approved the plan, this would also lead to a process for the evaluation of the two exchanges, after which the parity thus established would once again be submitted for approval in subsequent extraordinary shareholder meetings, and the merger would only take place if the required percentage of votes were approved, according to the status of the two entities".

Octavian Molnar, deputy managing director of "IFB Finwest" and member of the Board of Directors of the BSE

"The merger would be profitable because only one entity would remain that would be able to impose its own policy on the market. For shareholders, the benefit of the merger would be that both markets would be run by a unified management which would help reduce costs in the medium term. An exchange which has a spot market and one for derivatives is a lot more attractive. The benefit to intermediaries would be that they would no longer have to report to two clearing houses, whereas investors would benefit from getting easier access to the instruments. The competition isn"t domestic. It is foreign. Domestic competition isn"t in the interest of the Romanian state".

Lucian Anghel, chief-economist of BCR

"Size matters when it comes to the increase of the potential of the capital market. Big fish swallow the little ones".

Alexandru Elian, the president of "Delta Valori Mobiliare"

"I am skeptical when it comes to the merger because both exchanges first need

Both exchanges need to first solve the problems they have with their internal organization, their instruments and their business, etc., and the merger will not solve these issues We first need to follow the same road that the European exchanges are following. Then, the merger will eliminate competition, which is not a good thing. I can"t discuss in detail the effects that the merger would have on everyone (investors, shareholders, brokerages etc.), because the proposal is still being reviewed at the moment".

Patrick Young, proposed by Teodor Ancuţa as CEO of Sibex

"The merger between Sibex and the Bucharest Stock Exchange would not benefit the domestic capital market. Monopolies aren"t good in capitalism".

Bogdan Baltazar, economic analyst

"The merger is not a bad thing in itself, it would be a good thing if we had a single exchange, it would make the market more attractive. The two exchanges are complementary, which used to be a good thing until now. The merger will allow investors to access the full range of financial instruments from the same spot, and make it much easier to make connections between the two markets. This will allow issuers and investors to focus on a single direction".

Iulian Panait, president of KTD Invest

"What we have is basically two markets with different activities, but at this moment it would be easier for Romania to have a single market. Had our investment culture been different, things would have been different, but in Romania, investing on the stock market isn"t exactly commonplace. It is more useful for investors to have a single stock exchange".

Răzvan Paşol, president of Intercapital Invest

"The merger is a good idea, as market consolidation is a subject that"s currently being discussed on the international markets. Still, the Romanian market isn"t big enough to justify the existence of two exchanges. The direct effect of the merger would be an increase in efficiency. There will no longer be two trading platforms. It will be a lot easier if there was just one platform, one depository and one set of rules. It"s more of a matter of efficiency. The activity of the two exchanges that we are talking about is now complementary. As for the parity between the two stocks, it"s not the turnover of the two exchanges or their market value that would need to be taken into account. It is a joke to think like that. What we are dealing with is two distinct companies. An evaluation is needed to allow shareholders to decide the parity between the shares of the two exchanges".

Eugen Voicu, managing director at Certinvest

"I see only positive results if this merger were to go through. I don"t think that the fragmentation of the Romanian capital market that we are currently seeing has any benefits for anyone. A potential merger would cumulate the potential of both exchanges, and their size would increase. A greater market could become more visible to Romanian and foreign investors alike. Fees are currently high, but this is happening because of the trading volumes. If the exchanges were to merge, cutting their fees wouldn"t hurt. The market would see bigger turnover, after all. Concerning the parity of the stock of the new exchange, neither the market value nor the turnover are to be taken into account. It is up to the shareholders to decide on this subject, depending on the evaluations that will be performed".

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