TMX Group Inc. got what it could for shareholders from the Maple Group consortium in the friendly deal the parties just struck. Now it's up to regulators to ensure that users of Canada's markets are protected.
TMX was in a funny spot as it dealt with the hostile bid from Maple Group. As a public company that also provides a public service because it's the operator of the country's main stock markets, TMX's board faced conflicting priorities. Should the board worry only about the price for shareholders, or be willing to accept less for shareholders to ensure that market users are protected?
TMX's negotiating position wasn't strong as it faced Maple's 13 members, which includes some of the country's biggest banks. There is no other bidder. Markets have plunged since Maple made its $50-a-share bid in June, making extracting concessions more difficult.
Behind the scenes, there was considerable pressure from shareholders who just wanted a deal signed to ensure a better chance that they got their $50 a share from Maple. Not a lot of things are going right for money managers in this market. Nobody wanted the TMX messing around with this bid, which carries a handsome premium.
In that environment, investors in TMX didn't have a lot of time for talk of stakeholders such as market customers. They cared about shareholders, and the price they got. Stakeholders – the customers and users of TMX, mainly – are the regulators' problems. However, that's short-sighted because any transaction that didn't protect consumers of exchange services would die at the hands of regulators, and shareholders would never see the $50.
Given that, TMX managed a deal that has a bit of everything.
TMX had issues about the amount of money that Maple borrowed to back the offer, the lack of independent governance and the uncertainty about some key parts of the business plan. TMX wanted to know what it would cost to acquire the CDS Inc. clearing system and the rival trading business known as Alpha. And TMX wanted protection for its shareholders in the form of a break fee, in case regulators nixed the transaction.
The company got real results on most of those items. There's a break fee of $39-million. There's a process to establish the value of Alpha and CDS and, just as importantly, TMX has the ability to opt out of the friendly deal if it turns out that the price for Alpha or CDS is too high.
TMX was worried that borrowing too much money would hinder its ability to expand in good times and weather bad times. TMX says it's comfortable with the fact that the new company would be able to pay down the debt in short order, something Maple has always said is possible.
That may be true, or it may be that TMX didn't have the ability to move Maple on this question. But the fact is, some shareholders are going to call for a recapitalization using borrowed money if the Maple deal fails anyway, in a bid to support the share price, so it's not a smart hill to fight and die on.
On governance, TMX negotiated a deal that gives the company an independent chair of the board, rather than one nominated by Maple. There will be a fully independent governance committee of the board. That will go some way to providing protection for users of the markets who are concerned that a bank-dominated Maple Group would not be as friendly to other market users.
In the end, it will be regulators at the Ontario Securities Commission, their equivalents in Quebec, British Columbia and Alberta, and at the Competition Bureau in Ottawa who will have to judge whether the deal is fair to customers.
But TMX has done a lot to ensure a deal that makes sense for all.