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Is ASX Ltd a takeover target?

Amid the recent market volatility shares in the national stock exchange ASX Ltd (ASX: ASX) have continued on a steady upward trajectory to gain around 30% over the past two years. This compares favourably to the 5% fall delivered by the benchmark S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) over the same period and the strong returns for the ASX reflect a business with defensive earnings streams and a steady long-term growth outlook.

Moreover, the local bourse remains the subject of takeover speculation and was the subject of an $8 billion takeover bid in 2011 from the Singapore stock exchange that was rejected by the Labor government at the time.

The Turnbull government recently relaxed ownership restrictions on the ASX and Australia’s next government may be more likely to approve a deal given the shift in support for innovation across the financial services sector.

A merger with the Singapore stock exchange makes sense if Australian politicians are serious about lifting the nation’s presence as a regional financial services centre able to leverage off the fast-growing Asian economies.

Currently the local bourse remains concentrated compared to global rivals, dominated as it is by four big banks including Commonwealth Bank of Australia (ASX: CBA), some iron ore miners and a couple of supermarkets.

This goes to show how a merger would bring advantages in creating a top-tier pan-Asian exchange able to tap vast amounts of capital and serve up far more investment grade companies for investors. Any merger would also bring synergy benefits via scale, although there would be complications with both operating separate derivatives, futures and equity clearing and settlement houses in different currencies.

This week London Stock Exchange investors voted in favour of a mega-merger with Germany’s Deutsche Bourse in a deal likely to be railroaded through post-Brexit.

While other exchanges look to scale up in fear of being left behind as markets globalise and become increasingly interconnected. Recently, Australia’s hottest technology start-up Atlassian chose to list in the US, while the quality of many other IPOs coming to the Australian market has been understandably criticised.

Today the ASX touched a post-GFC share price high, despite the generally slim returns for equity markets in today’s low growth world and for investors it continues to remain a reasonable investment opportunity aside. Moreover, I would not be surprised to see the Singapore Exchange come knocking at the door again if the country returns a government amenable to another offer.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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