You've probably seen the press reports about the discussion of a potential merger of the Abu Dhabi Exchange and the Dubai Financial Market. Those I've seen outline the compelling economic case for the merger. There just isn't enough volume to support two markets in the UAE. While not as dire a case as that for the merger of Nasdaq Dubai with the DFM, there is strong rationale: consolidation will lower costs.
Not as often directly emphasized but much more important is that a merger would increase liquidity for both issuers and investors. A robust capital market in both equity and debt will foster greater economic development.
All well and good.
But I haven't seen any discussion of what perhaps is another key issue. Who will control the merged entity? And the consequence of that control.
The old saying is that cash is king. And the guy with the cash is primus inter pares among royalty.
Before its recent problems, Dubai had a constrained cashflow from resources and operations (as opposed to borrowed funds). That situation has been made even worse by the demands of the DW rescheduling and other likely problems already on the horizon or just below. A merger offers Dubai the chance to monetize some of its foreign assets (LSE, Nasdaq) to meet its cash flow needs as it deleverages.
Abu Dhabi is flush with cash. And its credit is sterling with bankers and investors. It has a much stronger hand. It can make significant new investments - acquisitions and build outs. It can, if it wishes, use this opportunity to accelerate a shift in the economic landscape of the UAE. To become the financial center.
Control of the merged exchange would be more than a matter of prestige, though one shouldn't discount the ego factor as a motive in transactions. Prior to the takeover by Chemical Bank, Chase Manhattan Bank was in discussion with Bank of America about a merger. The deal foundered on the "substantial" issue of where the merged entity's headquarters would be. San Francisco or New York. Chase wound up as prey not predator. BofA in less tender hands.
Control of the merged exchange will affect the financial landscape in the UAE. In rather broad brush strokes we can characterize the current financial situation in the UAE as Abu Dhabi for project finance and Dubai for more market oriented financial transactions.
But if the center of gravity for the merged stock market shifts to
Sowwah Square /
Sowwah Island, then how seriously does this undermine Dubai's dream of being a full service financial center?
I think fundamentally.
In such a situation what is the appeal of Dubai?
It's probably not going to be access to issuers at least for several years. Access to investors? Maybe. But if the economy in the Emirate has a slow recovery as is anticipated and Abu Dhabi is relatively speaking booming, where will the interests of investors and bankers be focused?
To be clear, this isn't a prediction of an immediate reversal of Dubai's role as a financial center. A financial Armageddon. Nor is it meant as the sole variable to explain a shift to Abu Dhabi from Dubai. There are other factors as well.
Rather it's about a shift in emphasis and slower growth in Dubai vis a vis the financial center in Abu Dhabi. Not the "End" but the "Beginning of the End".
Think of Philadelphia and New York. Within a five minute walk in Philadelphia, you can see the impressive buildings of the first two Banks of the United States. Once the undisputed financial and commercial capital of the USA, Philadelphia was eclipsed by New York. Not overnight. And it still retains its own role and stock exchange.
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