March 02, 2011
John Spears
The merger of the Toronto and London stock exchanges is driven by a shared passion for helping small and medium-sized companies get financing, the chief executives of the two exchanges insist.
But Toronto financier Mark McQueen told a Legislature committee Tuesday that bitter experience shows foreign capital markets just aren’t interested in smaller Canadian firms.
“There is no bucket of gold over in Europe and there is no liquid market for small caps, and there is no horde of research analysts dying to publish research on their companies,” said McQueen, chief executive of Wellington Financial LP.
“As with Elizabeth Taylor’s eighth marriage, think of the ‘improved access to capital’ argument as the triumph of hope over experience.”
McQueen pointed to a string of Canadian companies that had hopefully taken the plunge into the London exchange’s AIM market — the counterpart of the TSX Venture Exchange — since 2006, but have since walked away.
“Firms from around the world recognize that companies have a natural investor following,” he said. “And it’s rarely overseas.”
Waterloo’s Research in Motion would not likely have succeeded in the mid-1990s had it tried to raise capital in London when it was developing the BlackBerry, he said.
That wasn’t the message delivered by Tom Kloet of the TMX Group and Xavier Rolet of the London Stock Exchange Group, who professed a mutual passion for helping small and medium-sized companies raise capital.
“Small-cap companies are the lifeblood of the Canadian market, are where we build the future strength of our market and where we expect to see continued growth and success,” Kloet told the committee.
“If a mining company in northern Ontario lists on one of our Canadian exchanges, we expect to be able to offer them a more seamless access to investors from Europe and other markets.”
He added that the merger will allow the exchange to offer more competitive fees.
“We will work with these companies to facilitate their growth and expansion by bringing new investors to their doorstep,” he said.
Rolet also insisted the Toronto exchange will benefit from the merger.
“We expect to leverage this partnership to attract more, not less, activity on Canadian markets,” Rolet said.
That will create “a deeper and more international capital pool for Canadian public companies of all sizes,” he said.
But McQueen said the rosy view of the exchanges hasn’t been proven in real life, and advised the Legislature to build in some safeguards if the merger proceeds.
He said the TSX should draft a memorandum of understanding with listed companies, regulators and provincial governments, to guarantee measures such as a minimum numbers of seats for Canadians on the merged board and a minimum number of Canadians in executive positions.
Ontario should also hold a “golden share” that would give the province the power to force a demerger if the conditions in the memorandum aren’t met, he said.
Some of the politicians shared McQueen’s skepticism toward the merger.
“You view is extremely positive. My view is extremely neutral,” Conservative Peter Shurman told the chief executives.
Gilles Bisson of the New Democrats said he’s worried by the prospect of Canadian influence diminishing over time.
Initially, the board of the holding company resulting from the merger will have seven Canadian directors, five Britons and three Italians.
But after four years, the guarantee of seven Canadians ends, and the only stipulation will be a minimum of three Canadians.
Kloet noted that there’s nothing to prevent the owners of the exchange from electing more than three Canadians.
Conservative Frank Klees at one point said he was frustrated with the long-winded answers Kloet and Rolet gave:
“These people speak longer than politicians,” he said.