THEMATIC RESEARCH Research and Advisory

Inside this Report

Executive Summary 2

The Merger Talks 4 through the Years Here and Now: The Current State of the 5 Exchanges The Inevitable

Benefits of a Merger 6

Will a Merger of ADX Consolidation 7 and DFM Make Sense? What Could Hinder a 10 Merger?

Annexes

Background on UAE 12 Markets

Precedence from the 13 World Stage

Sources and Citations 14

Contacts and Disclaimer 15

Monday, October 1, 2018 Let the Merger Ensue...

After several years of hibernation, talks about a potential merger or consolidation of UAE’s primary exchanges: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) have become rife again. Since the last time that such an event was thought to have materialized (ca. 2013-2014), much has already happened—including the UAE now categorized as an Emerging Market.

Perhaps this time, a merger could finally come into fruition. One Country, One Exchange has a nice ring to it; certainly makes a lot of economic sense and strengthens Brand UAE.

The Time Is Golden for the Emergence of a Single Market with Brand UAE

As this report is written, both the ADX and DFM have protractedly seen thin volumes of trades. The combined markets’ 1H18 monthly average turnover was ca. AED18bn, more than 20% lower than the monthly average turnover of 2017.

Markets’ Operating Margins and Sustainable Growth Rates as represented by DFM’s data have been under pressure in the past few years. The need to counter falling margins and rationalize costs is a strong driving force behind any merger and one that should be heavily considered.

The latest market valuations of both markets are lower compared to their historical averages— making it opportune to reach a compromise valuation for a potential unification.

In the meantime, economic prospects for 2018 and beyond are healthier compared to the past year. As such, there is no better time than at present to seriously engage and work towards a unification process.

Succession of Events Could Indicate that a Merger Would be Pushing Through

Recent events have drawn further on a history of collaboration between the emirates of Abu Dhabi and Dubai.

Most recently, there have been reports that flagship carriers, Etihad Airways and Emirates Airlines are supposed to be having exploratory talks on combining their operations. Months before, the two airlines have extended their ties as Etihad has allowed its pilots to take up opportunities in the Dubai-based carrier for as long as two years. Prior to that, a Joint Venture between mega developers, Aldar and Emaar came to light. And previously, there was the mega-merger of Dubai Aluminium and Emirates Aluminium which is now known as Emirates Global Aluminium or EGA.

In early June 2018, the Chief Executive of the Securities and Commodities Authority (SCA), Dr. Obaid Al Zaabi, announced that the UAE Central Bank has assumed the role of Settlement and Clearing for ADX and DFM1.

The members of the investment community, led by regulators are reported by the general media to be in full support of a potential consolidation of the exchanges. A stronger and bigger unified market will also be important in SCA’s endeavors for the UAE to further develop the financial markets.

1 Source: https://www.reuters.com/article/emirates-regulator/uae-central-bank-assumes-role-of-settlement-and-clearing-agent -idUSL8N1TD3A3

Thematic Research  UAE: One Country, One Exchange Page 2 Let the Merger Ensue...

An Exchange Merger Would Mean ...

A merger of the exchanges is an event that could help energize the UAE’s financial markets— as a uniform and potentially more efficient exchange could make it easier for investors to trade across markets, leading to a more stimulating trading activity and eventually encouraging better inflows of foreign and institutional investments.

Benefits are seen on many layers: on the exchange, among the listed firms and among the investors.

For the Exchange: A singular market offers opportunity for more diversified products and services. Further opportunities could arise from synergies and less complexities. There is also the potential for an increased presence in the global stage. Take the case of Southeast Asia’s Philippine Stock Exchange: two bourses became one in 1992, following a presidential decree. Post-unification of its exchanges, the Philippine market saw market capitalization expand by 355%, value of transactions surged by 385% and the foreign portfolio investment expanded by nearly 300% between 1992 and 1994 (Ho and Odhiambo, 2015).

For the Listed Companies: A unified exchange could potentially provide the listed firms cost reduction, better liquidity and increased foreign and institutional participation.

For the Investors: A merged exchange could potentially provide the investors greater access and overall better economic outcomes as well as risk reduction.

Mind the Caveat

While there may have been a growing set of indicators pointing to a merger happening this time around, we need to be mindful of the following that could derail the process, once again:

 Valuation consensus of the exchanges and the dynamics of the consolidation could hinder a potential merger process.

 Control aspects remain key for such an event to materialize.

 Should a merger proceed, timing is quite important to generate the desired momentum.

Thematic Research  UAE: One Country, One Exchange Page 3 The Merger Talks Through the Years

This year, 2018, marks the 18th year of birth of both the ADX and DFM. A few years into the markets’ existence, whispers of a potential unification came up. However, it was only after the Global Financial Crisis of 2008 that merger speculations intensified as exchanges around the world scampered to find liquidity.

Below are the highlights of the published accounts of public discourse on the merger of ADX and DFM:

Various experts’ opinions were culled by an Argaam.com article. Benefits to a 2007 merger between the two exchanges were shared by prominent business figures.

Based on published reports from various dailies, in 4Q10, Goldman Sachs as commissioned by the Emirates Investment Co. (which was reported to have been 2010 in charge of a merger back then) completed a study on the merger of the two exchanges.

Abdullah Al Turaifi, then chief executive of the Securities and Commodities 2011 Authority (SCA) signified support for a potential unification of the exchanges.

Bourse merger proposal was revived. Prior merger talks were halted reportedly due to differences over how to value the exchanges, and because of competing public priorities such as the aftermath of Dubai’s 2009-2010 corporate debt 2013 crisis. Abu Dhabi reportedly hired J.P. Morgan Chase and FGB to advise on the merger. Investment Corporation of Dubai, the flagship holding company which owns stakes in many of Dubai’s top entities, including DFM’s parent, Borse Dubai, had hired Citigroup.

Once again talks bogged down on the proposed merger, mainly due to the issue of valuation. The valuation of DFM, the Gulf’s only listed bourse, had increased significantly since the advisers were first appointed, as trading increased during a bull run which saw the value of Dubai’s benchmark index jump nearly 60% 2014 between 01 January and 06 May 2014. Based on a valuation of around 20x EBITDA used under the merger plan, DFM’s value rose from around AED2bn at the end September 2013 to AED4.64bn at the end of March 2014. The merger plan valuation, conducted by Goldman Sachs, according to two of the sources, put ADX at about 10-12x EBITDA.

Dr. Obaid Al Zaabi, then acting CEO of SCA, was quoted in a report saying that 2017 the decision of merging ADX and DFM lies with the management of the two markets.

In May 2018, Al Khaleej newspaper reported that the settlement of ADX and DFM’s transactions has been assigned to the UAE Central Bank in May. Many see this as a preparatory procedure before the potential merger. 2018 In June 2018, Dr. Obaid Al Zaabi, the current CEO of SCA, announced that the UAE Central Bank has assumed the role of settlement and clearing agent for market transactions.

Thematic Research  UAE: One Country, One Exchange Page 4 The Current State of the Exchanges

Long-drawn Out Thin Volumes in the Markets

Both the ADX and DFM have protractedly seen thin volumes of trades. In the past two years, the combined turnovers of ADX and DFM traded below the normalized 5y average (see chart to the left). For 1H18, monthly average turnover was ca. AED18bn, more than 20% lower than the monthly average turnover of 2017.

Overall listings this year, so far, have been constrained with no IPOs versus at least two in 2017. There have been announcements of planned IPOs such as UPP’s ServeU, DIC’s Emicool, Bloom Holdings and Emirates Aluminium. However, these are just announcements at this stage and Emirates Aluminium already disclosed that its IPO shall be delayed to 2019. This is not surprising, given that market conditions are not conducive at the moment for listings.

Nagging Pressure on Margins and Sustainable Growth

As there is no current access to ADX’s financial statements, we look at the fundamental data of publicly-listed DFM and use them as proxy to check for the UAE markets’ fundamental health.

Operating Margins, as represented by DFM’s margins, have been under pressure in the past three years. The exchange, as it currently stands, could not offset the weakness in business volume. As the YTD volumes continue to be moving in a similar weak trend, we expect further pressure on operating margins.

Another issue of note is that with the exception of the year 2014, the annual sustainable growth rate of DFM has been negative. This follows from a downward trajectory in Returns of Equity coupled with unchecked cash payout ratios.

Current Valuations Compelling versus History

As of end-June 2018, both markets were trading below their historical averages: 12-mo Trailing PE of ADX at 12.4x fell behind the 5y and 10 averages of 14.2x and 13.3x, respectively. The same is true for DFM whose 12-mo trailing PE at 9.1x was below the 5y and 10y averages of 13x and 20.4x, respectively. In terms of book valuation—the same trend was visible. This brings forward a great opportunity for the exchanges to arrive at a compromise valuation, in case of an exchange unification.

Thematic Research  UAE: One Country, One Exchange Page 5 The Benefits of a Merger of the Exchanges

When stock exchanges merge, there could be significant benefits to the investment community.

To the Unified Stock Exchange

ECONOMIES OF SCALE. The exchanges could focus their attention on benefiting from economies of scale through the combination of diverse geographic markets. The transition by stock exchanges to electronic trading systems represents one of the greatest opportunities to reduce costs for individual exchanges and these savings are potentially greater when two exchanges merge. As trading volumes increase, there has also been a tendency for those exchanges to increase their investment in new technologies that have the ability to satisfy the demands of sophisticated investors. Although the cost to implement such technology into trading systems can be substantial as trades increase, the marginal cost per trade is reduced as argued by Aggarwal and Dahiya (2008).

Case in point: the 2006 merger of NYSE and Euronext. The total savings were reported to be USD375mn. This benefit was accomplished by integrating three cash trading systems and three derivatives systems into single global cash and derivatives platforms. As well, 10 data centers were reduced to four and the four existing networks were reduced to one.

DIVERSIFICATION. Exchanges can otherwise direct their attention to offering a diverse set of products to customers through the combination of different functions. An exchange merger would allow the opportunity for a greater number of financial instruments to be offered through one platform. In the case of the NYSE-Euronext merger, the NYSE was able to add a derivatives platform to its existing breadth of products, thereby improving its product mix. In the past, the Securities Exchange Commission (SEC) had been opposed to exchanges offering the trading of both equities and derivatives as it represented an unfair advantage from an informational perspective. This opposition limited the growth opportunities for exchanges as documented by Kothari (2008).

INCREASED PRESENCE GLOBALLY. A snowball effect of a unified exchange is the potential for an increased presence in the global stage. A potentially larger global representation would have aided in the reduction of costs and the creation of revenue synergies, while also achieving greater liquidity. A larger market could also potentially attract more dual-listings.

To the Listed Companies

POTENTIAL COST REDUCTION. The decision for a company to list on an international exchange in addition to its domestic exchange is based on the desire to reduce the cost of raising capital. These costs include the direct costs of listing fees, as well as the indirect costs related to compliance with international regulation. Dual listing can also result in attracting more cost-conscious investors seeking greater transparency. It can be argued that the information available to investors would be more reliable and exact under a dual listing framework, since the more stringent stock exchange would provide investors higher quality information.

POTENTIAL INCREASE IN LIQUIDITY. Liquidity is important for firms aiming to control their cost of capital. As a pioneering study (published in the Journal of Financial Economics, in 1986) suggests, the more liquid a company’s securities, the lower its cost of capital (i.e., low– to no-liquidity premium, lower investment banking fees for the issuance of new equity, etc.) the higher its stock price. Where the trading volumes are high, a particular stock becomes easier to sell with a reduced bid-ask spread. This also assists those investors who desire to sell their stock quickly and efficiently. Liquidity increases with the number of potential investors. A deeper market may mitigate the impact of large, individual trades on future price movements. Enhanced liquidity reduces information and non- monetary transaction costs (i.e. cost reduction related to combining of trading systems). Direct costs can also be reduced which may entice investors to increase their trading activity (Nielsson, 2009).

POTENTIAL INCREASE IN FOREIGN and INSTITUTIONAL PARTCIPATION. An exchange that is unified in trading platform, regulations and systems could likely entice more participation from the global institutional community. Foreign institutional investors would particularly have more confidence in a market which has better depth and breadth.

To the Investor

GREATER ACCESS and BETTER ECONOMIC OUTCOME. One of the biggest advantages for an investor is the opportunity to trade in different financial instruments in different geographic markets with lower transaction costs. Merged exchanges that operate fewer trading platforms can simplify trading and provide a better economic outcome.

RISK REDUCTION. The investor having access to a wider selection of financial instruments would also allow for greater risk reduction, which could be achieved via diversification.

Thematic Research  UAE: One Country, One Exchange Page 6 Will a Merger Between ADX and DFM Make Sense?

At this point, the merger between ADX and DFM remains highly speculative and completely theoretical. Even so, there are very compelling arguments to support such an event.

Hence, we look at key parameters of the markets to probe if having a unified and larger stock exchange is more advantageous over having two distinct yet smaller ones.

Data used in the analysis herein is based on secondary data generated from Bloomberg. We have looked at the last five years, 2013 to 2017.

Our methodology to understand the benefits of the merger of ADX and DFM is straight forward and is based on a similar study (Joseph and Fernandez, 2016):

1. The data of the major exchanges in the Middle East region are compared and ranked on the basis of different parameters such as market capitalization, trading volume and value turnover, and number of days traded.

2. Ceteris paribus, the data of ADX and DFM are combined into one exchange and is again ranked against the other exchanges in the region.

Annual Turnover: Value Traded (USD’000) As of end-2017, the size of the world stock market was estimated at ca. USD81.26 trillion (Bloomberg World Exchange Market Capitalization Index). The total value of stocks traded in the select Mid-East stock markets included herein was USD302.18bn in 2017, and nearly 73% of this was in the Saudi Stock Exchange. The stock exchanges were ranked based on the value of stocks traded, and the result would show the dominance of the Saudi Stock Exchange. A far second would be DFM, and ADX would be fifth. These rankings have not changed much in the last five years.

Exchange 2013 2014 2015 2016 2017 5y Average Rank 1 Market Share ADX 22,869,604 39,252,927 15,967,643 12,641,875 12,434,152 20,633,240 5 4.11% DFM 38,299,396 91,900,258 33,834,132 29,638,250 23,084,326 43,351,272 2 7.64% TADAWUL 325,649,121 567,934,729 439,885,300 302,190,116 220,555,615 371,242,976 1 72.99% CASE 9,312,556 18,579,620 11,641,087 14,360,907 10,716,844 12,922,203 6 3.55% BSE 566,945 713,214 291,094 329,091 552,844 490,637 8 0.18% KSE 39,055,603 21,381,720 13,133,996 9,482,267 18,769,057 20,364,528 3 6.21% MSE 4,692,120 4,665,498 2,864,066 2,052,632 1,860,150 3,226,893 7 0.62% BSIL 111,214 157,292 210,624 280,969 269,628 205,945 9 0.09% QSE 16,750,572 39,707,530 21,607,816 14,135,689 13,935,230 21,227,367 4 4.61%

Total 457,307,130 784,292,788 539,435,758 385,111,795 302,177,845 Source: Bloomberg, 1 Rank based on 2017 Turnover

All else remaining the same and using year 2017 as base, turnover was re-ranked following the consolidation of ADX and DFM into a single exchange. Given that Saudi’s turnover far outweighs the rest, it would retain its dominance but UAE would now see a double-digit market share of close to 12%. In essence, ADX would benefit as its ranking and market share move forward.

Thematic Research  UAE: One Country, One Exchange Page 7 Annual Turnover: Volume Traded (Number of Shares) Trading volume is the number of shares or contracts that indicates the overall activity of a security or market for a given period and could serve as an important technical indicator used to confirm a trend or trend reversal.

In 2017, the exchanges recorded a total volume of 242.33bn shares. This time, Egypt’s exchange cornered top ranking and was very closely followed by DFM. ADX was in the middling position at 5th. In the last five years, DFM held either the top or the next to the top position, in terms of volume. Exchange 2013 2014 2015 2016 2017 5y Average Rank 1 Market Share ADX 51,018,612,063 56,965,394,704 25,473,754,022 25,022,655,979 24,732,906,692 36,642,664,692 5 10.21% DFM 97,425,297,644 115,059,773,936 65,033,846,624 78,504,153,440 61,483,048,228 83,501,223,974 2 25.37% TADAWUL 42,182,449,400 65,436,561,500 61,140,732,860 61,353,235,020 38,886,666,721 53,799,929,100 4 16.05% CASE 20,516,219,116 39,155,216,377 33,126,985,025 57,398,236,187 61,590,907,612 42,357,512,863 1 25.42% BSE 1,813,420,297 1,124,745,188 513,999,028 733,006,915 1,108,730,708 1,058,780,427 8 0.46% KSE 126,507,206,352 52,986,052,288 41,497,010,552 30,211,984,472 50,200,588,362 60,280,568,405 3 20.72% MSE 5,877,741,430 4,482,118,636 3,190,412,373 3,366,042,959 2,615,772,024 3,906,417,484 6 1.08% BSIL 19,087,961 29,462,600 29,323,519 47,589,026 37,631,130 32,618,847 9 0.02% QSE 1,601,464,119 2,804,735,567 1,892,617,999 1,397,949,783 1,676,115,101 1,874,576,514 7 0.69%

Total 346,961,498,382 338,044,060,796 231,898,682,002 258,034,853,781 242,332,366,578 Source: Bloomberg, 1 Rank based on 2017 Volume Traded

All else remaining the same and using year 2017 as base, volume turnover was re-ranked following the consolidation of ADX and DFM into a single exchange. In terms of volume traded, a combined UAE market would dominate the region. The average of the combined market in the last five years would be around 120bn. Following from behind would be Kuwait with an average of ca. 60bn. The combined market position in terms of volume traded is an opportunity to cement UAE’s position in the region on the basis of volume of shares traded and reap the advantage of economies of scale and visibility. This is something that the decision makers could use to speed up a merger process such that all stakeholders benefit at the earliest.

Number of Trading Days The average annual number of trading days varies from 248 to 253 days during the period of study. Both ADX and DFM showed the most trading days, along with Lebanon. Hence, should there be a merger, the combined ADX and DFM will continue to lead the table as far as the number of days traded are concerned.

Exchange 2013 2014 2015 2016 2017 5y Average ADX 252 254 252 252 255 253

DFM 252 254 252 252 255 253

TADAWUL 225 251 253 251 253 247

CASE 246 247 248 249 248 248

BSE 248 249 251 252 250 250

KSE 249 246 252 250 252 250

MSE 246 247 251 248 251 249

BSIL 252 254 252 252 255 253

QSE 250 250 254 253 251 252

Source: Bloomberg

Thematic Research  UAE: One Country, One Exchange Page 8 Market Capitalization (USDmn) Market Capitalization or Market Cap—refers to the total equity value of all companies in the respective equity market and has traditionally been used as a measure of stock market activity. It is also used to reflect a country’s level of credit and economic growth, in anticipation of future growth in the equity market. Market Cap also influences economic growth predictions and public consensus concerning the value of the stock market (Joseph and Fernandez, 2016). The total market capitalization of the stock markets included in this report in 2017 was ca. USD930.96mn. Among them, Saudi Stock Exchange had the highest market capitalization in 2017 of USD450.54mn, followed by ADX ending 2017 with a market cap of USD124.01mn. DFM had fifth position, following Qatar and Kuwait.

Exchange 2013 2014 2015 2016 2017 5y Average Rank 1 Market Share ADX 109,497 113,658 111,838 120,743 124,008 115,949 2 13.32%

DFM 64,193 80,236 74,825 82,475 78,874 76,121 5 8.47%

TADAWUL 467,367 452,858 420,712 448,257 450,537 447,946 1 48.40%

CASE 25,407 31,375 25,403 18,182 22,664 24,606 7 2.43%

BSE 18,306 21,962 18,997 19,003 20,653 19,784 8 2.22%

KSE 109,847 101,180 86,046 85,605 91,455 94,827 4 9.82%

MSE 18,032 17,671 15,798 17,273 14,338 16,623 9 1.54%

BSIL 30,367 30,935 30,704 31,016 30,622 30,729 6 3.29%

QSE 121,819 154,065 128,066 132,690 97,805 126,889 3 10.51%

Total 964,836 1,003,940 912,388 955,245 930,957

Source: Bloomberg, 1 Rank based on 2017 Market Cap

Following a re-rank with ADX and DFM consolidated, Saudi would still retain its position and market share lead. However, the combined market of the UAE would now be in number 2 and market share would solidify to more than 20%.

Coming off from a lower base, the combined market which would take advantage of the economies of scope and scale, would be geared towards further growth and development.

Thematic Research  UAE: One Country, One Exchange Page 9 What Could Hinder a Merger?

In the preceding years, the UAE has witnessed developments that — taken collectively— could imply the readiness of both Abu Dhabi and Dubai to work further closer together.

In early June 2018 announcement made by Dr. Obaid al Zaabi, the Chief Executive of SCA, that the Central Bank of the UAE has assumed the role of settlement and clearing agent for market transactions. Previously, First Abu Dhabi Bank and Emirates NBD played that role for ADX and DFM, respectively.

The latest development from the flagship carrier, Etihad Airways, allowing its pilots to take up opportunities in the Dubai-based carrier, Emirates Airlines, for as long as two years—is the latest indication of strengthening partnership between the two largest emirates. A few months before, in March 2018, the UAE’s two largest listed real estate developers, Aldar and Emaar, formed a joint venture to deliver AED30bn of real estate schemes in the UAE and internationally. Preceding both, in June 2013, there was the merger of UAE’s two flagship state aluminum firms to create the world’s fifth largest aluminum company with an enterprise value of USD15bn. Emirates Global Aluminium became jointly held by Investment Corporation of Dubai (ICD) and Abu Dhabi state sovereign fund Mubadala.

While there may be recent indications that would encourage the investment community to speculate that this time, a merger between the country’s two biggest exchanges would really happen, let us not forget that over the years, due to one reason or another, the idea did not progress.

There are likely a few reasons to hinder such a process. The most prominent ones would be:

Valuation Issue

Reading between the lines among the scores of news reports pertaining to the merger process, one of the sticking points is the issue of valuation.

Each exchange has its own strong point: ADX has the bigger market cap, but DFM has the better turnover. Hence, it is not surprising that this has been an issue.

Control Aspects

In the recent M&A big stories that came out of the UAE, i.e., Aldar-Sorouh, NBAD-FGB, Mubadala-IPIC, the government has played a key role in making the consolidations see the light of day.

In prior talks of the merger of ADX and DFM, control aspects were part of the key issues. Despite economic pressures for consolidation in a number of industries, powerful shareholders are often reluctant to cede control.

Timing

Market conditions would have to be just right for the potential merger to achieve the most mileage.

Thematic Research  UAE: One Country, One Exchange Page 10 ANNEXES

Thematic Research  UAE: One Country, One Exchange Page 11 Background on UAE Markets

The Country

The United Arab Emirates (UAE) is located in the middle of the Arabian Gulf. The UAE is a federation of seven (7) Emirates including Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah, which are governed by the Federal Supreme Council (FSC) of rulers. Abu Dhabi and Dubai, the largest and the wealthiest emirates, dominate the UAE economy.

UAE is a rich and open economy with a high per capita income and a sizable annual trade surplus. Oil and Gas account for ca. 30% of GDP, 40% of export earnings and 40% of government revenue. Since the discovery of oil in the UAE, it achieved a profound transformation from a small desert region to a modern state with a very high standard of living. The UAE is a small country with a population of about 9.27mn (World Bank, 2016).

The UAE economy, which faced a more than anticipated slowdown in economic growth in 2017, is expected to bounce back from this year thanks to the higher oil prices and the various fiscal reform packages announced by the government.

Preliminary estimates by the Federal Competitiveness and Statistics Authority (FCSA) in June 2018 showed the UAE’s real gross domestic product (GDP) grew 0.8% in 2017. The International Monetary Fund’s (IMF) latest regional economic outlook has a revised estimate of 0.5% GDP growth for 2017 while GDP growth is expected to turn the corner this year and beyond with estimates at 2% in 2018 and 3% in 2019. Economists said Expo 2020 projects, high oil prices, fiscal stimulus and structural reforms are likely to support a growth recovery in 2018 and 2019.

The Stock Exchanges

There are three (3) stock exchanges in the UAE:

1. Abu Dhabi Securities Exchange (ADX) (formerly Abu Dhabi Securities Market, ADSM) is located in Abu Dhabi. It was established on 15 November 2000 to trade shares of UAE companies.

2. Dubai Financial Market (DFM) is a stock exchange located in Dubai. DFM started operations on 26 March 2000. DFM is 79.63% owned by Borse Dubai.

3. NASDAQ Dubai (formerly Dubai International Financial Exchange, DIFX) It is a stock exchange which opened on 26 September 2005 in Dubai. NASDAQ Dubai is an international stock exchange open to investors of any nationality based in any country. It has issuers based in countries all over including UK, South Africa, Australia, India, Kuwait, Bahrain, and Saudi Arabia. NASDAQ Dubai is 66.67% owned by DFM, with the rest of the ownership held by Borse Dubai.

Considering the relatively limited size of the population, the existence of three exchanges may well limit each market in terms of liquidity, order flows from international institutional investors and new listing requests from local and regional firms.

This situation is further complicated by the presence of more than one regulatory authority: ADX and DFM are regulated by SCA, while NASDAQ Dubai is supervised by Dubai Financial Services Authority.

The common goal of Abu Dhabi and Dubai, the two main emirates of the UAE, is to become the financial hub of the Gulf region. However, both emirates’ strategies to achieve such ambition may not necessarily be in synch.

Over the years, both markets have placed various platforms to encourage market activity. Still, market capitalization and trading value remain muted. This has provoked the idea of the merger of ADX and DFM with the intention to take advantage of the synergies of M&A.

Thematic Research  UAE: One Country, One Exchange Page 12 Precedence from the World Stage

Past M&As in businesses occurred in cycles or waves. Harford (2005) and Rhodes-Kropf, Robinson, and Viswanathan (2005) provide some explanation towards causes of this pattern of activity. Lamoreaux (1985) outlined the first wave of merger activity that occurred in the United States in the so-called Great Merger Movement 1895-1904, when small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. Companies formed during that time, such as DuPont, US Steel and General Electric were able to maintain dominance for long time periods. Others, such as International Paper and American Chicle, saw erosion in their market share. The six waves of merger and acquisition activity that have taken place are [adapted in part from (Weston, Chung and Hoag, 1990)]:

1895—1904 First Wave Horizontal Mergers

1916—1929 Second Wave Vertical Mergers

1965—1969 Third Wave Diversified Conglomerate Mergers

1981—1989 Fourth Wave Congeneric Mergers, Hostile Takeovers, Corporate Raids

1992—2000 Fifth Wave Cross-border Mergers

2003—2008 Sixth Wave Shareholder Activism, Private Equity, LBO

Stock exchange mergers incorporate elements from several of these waves. For example, two exchanges coming together can readily become larger through being involved in the same business (horizontal merger-first wave), but can also improve the product mix by being involved in option trading with different technologies and platforms (vertical merger-second wave) and additionally, can cut across international boundaries (fifth wave). Since the end of the 1990s, a number of stock exchanges have merged following the trend toward demutualization of the stock exchanges – the process of converting exchanges from nonprofit, member-owned organizations to for-profit, investor-owned corporations – which started in the early 1990s (Aggarwal, 2002; Aggarwal & Dahiya, 2006).

This process of demutualization has made securities trading more competitive and it is believed that the prominent reasons of mergers are: Economy of Scale; Economy of Scope; Increased Revenue or Market Share; Cross-selling; Cost Reduction including taxation; Diversification; Resource Transfer; Vertical Integration; Horizontal Integration; Employee or Social Capital Acquisition; and absorption of similar businesses to reduce competition.

These motivations all revolve around the realization of some synergy that would justify the merger/acquisition. (Philips, Faseruk & Glew, 2014).

When stock exchanges merge the benefits can be significant for the exchanges, the listed companies, and the investors (Kothari, 2008).

Date Acquirer Target

1999—2000 Canadian Venture Exchange (CDNX) Vancouver Stock Exchange Alberta Stock Exchange Winnipeg Stock Exchange 2000 Euronext Paris Stock Exchange Amsterdam Stock Exchange Brussels Stock Exchange 2001 Toronto Stock Exchange (TMX) Canadian Venture Exchange (CDNX)

2002 Euronext LIFFE Portuguese Exchange 2003—2004 OMX Helsinki Exchange Copenhagen Exchange 2006 NYSE Euronext

2007 London Stock Exchange Borsa Italiana

2008 NYSE Euronext American Stock Exchange

2008 CME Group Nymex

2017 NYSE Euronext National Stock Exchange

Source: Aggarwal & Dahiya, 2006; Chemmanur, He & Fulghieri, 2008; Goh, 2011, Wikipedia

Thematic Research  UAE: One Country, One Exchange Page 13 Sources and Citations

Joseph and Fernandez (2016). Comparative Study of GCC Markets. Accounting and Finance Research. http://www.sciedu.ca

Aggarwal, R. & Dahiya, S. (2006). Demutualization and Public Offerings of Financial Exchanges. Journal of Applied Corporate Finance, 18(3), 96-106. http:// dx.doi.org/10.1111/j.1745-6622.2006.00102.x

Sin-Yu H, Odhiambo, N. (2014,2015). Stock Market Development in the Philippines: Past and Present. Philippine Journal of Development.

Chemmanur, T. J., He, J. & Fulghieri, P. (2008). Competition and Cooperation among Exchanges: Effects on Corporate Cross-Listing Decisions and Listing Standards. Journal of Applied Corporate Finance, 20(3), 76-90. http://dx.doi.org/10.1111/j.1745- 6622.2008.00195.x

http://www.borsedubai.ae/borse-dubai-exchange-portfolio.htm

https://en.wikipedia.org/wiki/List_of_stock_exchange_mergers_in_the_Americas

http://gulf.argaam.com/article/articledetail/30607

https://www.bloomberg.com/news/articles/2010-10-17/goldman-sachs-is-in-final- stage-of-study-on-dfm-adx-merger-bayan-reports

https://gulfnews.com/business/sectors/markets/support-for-a-merger-1.763380

http://www.4-traders.com/DUBAI-FINANCIAL-MARKET-PJ-9059746/news/Dubai- Financial-Market-ADX-DFM-merger-lies-with-management-ndash-Obaid-Al-Zaabi- 25260840/

https://gulfnews.com/business/economy/uae-s-non-oil-contribution-to-gdp-to-swell- to-80-by-2021-1.2092158

https://tradingeconomics.com/united-arab-emirates/exports

https://www.reuters.com/article/emirates-regulator/uae-central-bank-assumes-role- of-settlement-and-clearing-agent-idUSL8N1TD3A3

https://www.reuters.com/article/us-emirates-aluminium-merger/uae-creates-15- billion-aluminium-firm-in-state-merger-idUSBRE9520EB20130603

Market data courtesy: Bloomberg

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