Large foreign holders of Osaka Securities Exchange (8697.T. OSE) are unhappy with the complicated terms of the proposed merger between the Tokyo Stock Exchange (TSE) and the OSE. The exchanges announced a merger agreement on November 22 last year, with the TSE agreeing to pay JPY480,000 a share for the OSE. OSE shares have been trading at a slight discount since, however, ostensibly because of the face-saving (for both sides) terms of the deal, where the TSE first makes OSE a subsidiary by acquiring a maximum of 66.6% of oustanding shares, then effecting a reverse merger through a stock swap that ostensibly makes the OSE the surviving company, at a ratio that values the TSE at 1.7 times the OSE.
The OSE has one of the highest foreign ownership ratios in Japan at 63% (as of September 2011), and they are unhappy with the announced merger terms, insisting the merger ratio should be closer to 1:1 because the OSE ranks nearly even with the TSE in terms of profitability. They believe the TSE should be paying something more like JPY550,000 per share for the OSE. Big holders of OSE stock like Fidelity (14.1%) and JO Hambro Capital Management (5.1%) may vote against the proposed merger, which requires a two-thirds majority approval from shareholders.
Seeing as how the deal has already almost fell through several times before the convoluted terms were agreed upon, it is unlikely that the terms will be changed unless the shareholder resolution to approve the deal does not pass, which is possible if the bulk of the OSE's foreign holders vote against the proposal.
If the deal collapses, however, investors would find themselves holding a lot of illiquid OSE stock that would undoubtedly see a tumble. Globally, since nearly all attempted cross-border mergers of exchanges since last spring have failed, such as the proposed merger between NYSE Euronext and the Deutshe Boerse. Even if there were a favorable global environment for exchange mergers, the TSE may be the only realistic suitor for the OSE.
(Source: Nikkei Net)