Singapore Exchange (SGX) (SGXL.SI) unveiled an agreed A$8.4 billion ($10.7 billion)  takeover offer for Sydney-based ASX (ASX.AX) on Monday to create the fifth-largest listed exchange in the world.

The merger of SGX and the ASX, Asia’s second and third largest listed bourses respectively, aims to ward off the threat of alternative trading systems, line up new avenues for growth and cut costs.

 

The deal marks the first major consolidation of Asia-Pacific exchanges and will result in US$30 million ($38.9 million) in cost savings.

 

“The offer is not near ASX’s all-time high, but it is certainly great,” said Mark Daniels, head of Australian equities at Aberdeen Asset Management, which owns ASX shares.

 

SGX offered a combination of A$22.00 in cash plus 3.473 of its own shares for each ASX share. It said in a joint statement with the ASX on Monday that the offer valued ASX shares at A$48.00 each, a 37 percent premium to ASX’s last trade. 

 

Shares in ASX spiked 25% to A$43.50 after it resumed trade, still well short of a record high of A$61 in early 2008.

 

SGX shares fell as much as 6.7% but quickly pared losses to trade down 1.8% at $9.40.

 

“This will be a highly competitive exchange group in an increasingly globalised world” SGX Chairman J. Y. Pillay said in a statement.

 

The deal will need approval from Australia’s Foreign Investment Review Board, which could be nervous about the deal as SGX is 23% owned by the Financial Sector Development Fund,which is controlled by Singapore’s central bank.

 

However Australia’s competition watchdog effectively gave the SGX a green light to pursue the takeover earlier Monday, saying it did not see any major concerns.

 

“I think it’s a matter between the Singapore Exchange and the Australian Exchange, and I can’t see that raising competition issues for us,” Australian Competition and Consumer Commission chief Graeme Samuel told Australian radio.

 

“We’re much more focused on the potential for new competitors to enter into the Australian market in terms of stock exchange dealings.”

 

The ASX is due to lose its effective domestic monopoly next year, with a new entrant, Europe’s Chi-X Australia Pty, expected to begin operation in 2011.

 

“The market will view a SGX-ASX combination as a defensive one, both being exchanges that have relatively mature organic domestic growth opportunities and facing the prospect of losing effective monopoly status with rising pricing pressures as alternative exchanges and trading venues erode share over time”, Citigroup analyst Robert Kongsaid in a note to clients.

 

A combined SGX-ASX would still rank behind Hong Kong Exchanges and Clearing Ltd (HKEx) (0388.HK), the world’s top exchange operator by market value.

 

SGX Chief Executive Magnus Bocker is set to become chief executive of the combined group, while SGX’s chairman-elect Chew Choon Seng is slated to become the non-executive chairman of the merged group.