Singapore Exchange agreed to buy ASX, Australia’s main stock-exchange operator, for A$8.4 billion ($10.8 billion) in cash and shares in a drive to compete with Hong Kong and Tokyo.

The operator of Singapore’s stock market is offering A$48 per ASX share, 37% more than the company’s last price on Oct. 22, the companies said at press briefings in Sydney and Singapore. The combination, which requires regulatory approval, would be the first between two exchange companies in the Asia- Pacific region and will create the world’s fifth-largest exchange company by market value.

 

Merging the region’s fifth- and eighth-largest exchange companies will combat rising competition, Singapore Exchange Chief Executive Officer Magnus Bocker and ASX CEO Robert Elstone said. Chi-X Global Inc., an electronic-trading platform, is working toward starting Australian operations by March. The takeover will boost Singapore Exchange’s earnings per share by about 20% before cost savings.

 

“More than anything, this deal will help with the marketing story to attract company listings,” said Simon Bonouvrie, who helps manage about $1.8 billion at Platypus Asset Management Pty. in Sydney, which owns some ASX shares. “The tie-up, however, would also give listed companies easier and more seamless access to deeper capital markets. It’s a fantastic deal for shareholders of both companies.”

 

Singapore Exchange fell 4% to $9.16 at 10:42 a.m. in Singapore. ASX shares jumped 20% to A$41.89 in Sydney. ASX shareholders will receive A$22 cash and 3.473 new shares in Singapore Exchange for every share they hold in the Australian bourse operator, the exchanges said.

 

Companies have raised $37 billion in initial stock sales in Hong Kong this year, almost seven times the total for the Singapore and Australia exchanges combined, according to data compiled by Bloomberg.

 

“The world of exchanges is rapidly changing,” Bocker said in Sydney. “This will make us a stronger player.”

 

The companies expect the deal to be implemented in the second quarter of 2011. The companies believe the merger is in the interests of both countries and are confident they will win regulators’ approval, Elstone said.

 

“I’d expect any merger between the Australian Stock Exchange and its Singapore counterpart to be closely scrutinized by regulators,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. “Regulators will want to ensure any merger upholds the integrity of the Australian stock exchange and does not compromise it in any shape or form.”

The combination will result in a more balanced portfolio of listed companies, Bocker said. Trading in shares of both companies was halted on Oct. 22.

 

The exchanges will remain separate legal entities under the combined company and will continue to be regulated locally, the companies said. The market capitalization of the combined company will be about US$12.3 billion, they said.

 

Singapore Exchange said Bocker will be chief executive of the new group company and Chew Choon Seng will be non-executive chairman. David Gonski, chairman of ASX, will be deputy group chairman, the Singapore company said, while Peter Hiom, current deputy chief executive of ASX, will be elevated to chief executive of the Australian bourse.

 

ASX posted a 13% increase in second-half profit this year as trading accelerated on the back of a recovering global economy. Net income rose to A$160.1 million in the six months ended June 30, from A$141.7 million a year earlier.

 

Singapore Exchange posted a net income of $320.1 million in the year ended June 2010, compared with $305.7 million the year before.

 

Morgan Stanley advised Singapore Exchange and UBS AG is ASX’s adviser, the companies said.

 

“Singapore, keen to establish itself as the financial center of Asia, needs to attract liquidity to its stock exchange,” said Will Rhode, an analyst at Tabb Group LLC, a Westborough, Massachusetts-based financial research and advisory firm focused on capital markets. There’s “just 27 firms trading more than US$10 million per day on the Singapore exchange, compared to 300 names in Tokyo. The acquisition of ASX would be a solution to that woe.”

 

Competition in the region is increasing. Chi-X Global has won preliminary approval to become a competitor to ASX. The Singaporean bourse and Chi-X Global, part owner of Europe’s largest alternative trading system, agreed in August last year to start the first exchange-backed dark pool in Asia.

 

Singapore Commodities Exchange, a unit of the Singapore bourse, faces competition from the Singapore Mercantile Exchange, which started operating in the city-state in August. SMX is backed by Financial Technologies (India), which operates the largest commodity exchange in India.

 

Australia’s stock market is worth about US$1.36 trillion, compared with Singapore’s US$558.2 billion, based on Oct. 22 prices according to data compiled by Bloomberg. Even so, Singapore Exchange is the larger company, with a market value of about US$7.86 billion, compared with ASX’s US$6 billion.

 

Since Bocker, former president of Nasdaq OMX Group Inc., took over from Hsieh Fu Hua as CEO of Singapore Exchange last year, the company has announced new initiatives to enhance the bourse’s position as an Asian capital markets hub. The exchange on Oct. 22 started trading 19 American depositary receipts of Asian companies to boost trading volumes.

 

In June, the bourse said it will invest $250 million in a new trading system that will be the world’s fastest when it goes live in 2011. The following month, Singapore Exchange and the London Metal Exchange said they will introduce cash-settled metals futures contracts by the first quarter of next year.