Dubai: On the market

A proposal to merge the operations of the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) appears to be gaining momentum, with stock market officials discussing a plan that could result in the creation of a powerful regional bourse better positioned to compete with nearby rivals and larger international operators.

While no formal announcements have been made, analysts and industry officials have been fueling speculation that the two exchanges are close to joining forces, with a series of reports and statements released in the media over the past few weeks.

According to Steve Drake, the head of capital markets for the Middle East for PricewaterhouseCoopers, there is a strong business case for the merger, though he concedes there may be some who will need to be convinced of the idea. “I think consolidation would help because it would provide that size and liquidity factor, which would help traded volumes,” Drake said on February 5.

The merger proposal is by no means a new one, having been floated by Essa Kazim, the chief executive of the DFM, in March 2010, when he told local media that talks were being held as the move to consolidate was “in the interest of everyone”.

In mid-2010 the media reported that the two exchanges were only days away from announcing a merger, though the tide of speculation receded again. However, this time regional and international imperatives could be the driving force necessary to push the deal through. Local media went as far as reporting that an organisational structure for the new entity – to be called the Emirates Financial Market – had been agreed on.

The proposed merger has been given the provisional backing of the national Securities and Commodities Authority (SCA), the UAE’s capital markets regulatory body. In mid-February, SCA chief executive Abdullah Al Turaifi told reporters his agency was waiting to hear from DFM and the ADX officials on the progress of their talks, adding that in principle the authority would look favourably on any consolidation.

“They have different companies, different boards, different strategies,” he said. “If they think it is good for the UAE, or good for them as companies, we will support it.”

Another supporter of the move is Jeff Springer, the chief executive of Nasdaq Dubai, who said a merger would serve to increase liquidity and interest for traders and investors.

“The UAE is too small to have two exchanges,” Singer said at a press conference in mid-January. “The DFM and ADX can retain their separate entities as long as the back office is united and investors can trade in one liquidity pool.”

There would be a number of advantages to bringing together the Dubai and Abu Dhabi bourses. Quite apart from the money saved by doing away with duplicated services and streamlining procedures, a stronger market covering both emirates would be more attractive to investors and brokers, some of whom have stepped back from the UAE bourses due to a lack of trading activity and opportunities.

Speculation on the proposed merger comes as a number of the world’s leading stock markets are either in the process of joining forces or are mulling such a move. In mid-February Germany’s Deutsche Börse announced it had struck an agreement to merge with NYSE Euronext. Though still waiting on approval by regulators, the $10.2bn deal could see the creation of the world’s largest exchange operator, with a reach that could extend as far as Dubai, with Borse Dubai – the majority owner of DFM – also being a major shareholder in the US-Scandinavian operator Nasdaq OMX and the London Stock Exchange (LSE). The new German-US operation could result in a gravitational pull away from other exchanges, potentially weakening both the value of Borse Dubai’s overseas investments and the appeal to investors of listing on smaller markets.

Another pairing potentially in the offing involves LSE itself, which is in the process of acquiring the Toronto Stock Exchange’s operator, TMX Group. If that deal clears all regulatory hurdles, Borse Dubai will have an 11.3% stake in the new operator, courtesy of its current holdings in the LSE. On February 9 Borse Dubai issued a statement saying it supported the merger and backed any initiative that created value for LSE shareholders.

“We continue to support the management in their efforts to create both a stronger platform and a more valuable enterprise for stakeholders,” the statement said.

It is as yet unclear if the DFM will follow the lead taken by international rivals and build a stronger base for local stakeholders. Though some might be still examining the details of a merger in the UAE, the long-term advantages of a combined operation should help to convince all parties involved of the merits of a tie-up.

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