INSIDE JOHN McKENZIE’S PLAN TO SELL THE TMX TO THE WORLD

The Toronto Stock Exchange is a bit of a mess. John McKenzie, the market’s boss, wouldn’t want it any other way. On a Wednesday morning in late November, the chief executive of TMX Group Ltd. joined executives at tech company Coveo Solutions to open TSX trading in a ceremony that scattered confetti across the exchange’s newly opened event space. They were celebrating an initial public offering that valued the Montrealbased artificial intelligence platform at $1.7-billion.

By early afternoon, Mr. McKenzie was avoiding tiny pieces of white and blue paper while leading a tour of the new cathedral for capitalists, a basketball-courtsized facility full of flashing screens, spotlights and cameras that opened in late October.

Mr. McKenzie has cause for celebration at the country’s premier marketplace operator, which also owns the Montreal Exchange and the TSX Venture Exchange. In his first media interview since becoming CEO in August, 2020 – the COVID-19 pandemic put a halt to face-to-face meetings – the new (ish) CEO says he’s now winning a global battle to secure new listings from public companies, the lifeblood of every exchange.

“We have a unique platform in Canada, as the operator of junior and senior markets, and we’re successfully selling that platform to the world,” Mr. McKenzie said.

He is also well into a cultural makeover that saw the TMX Group’s previous CEO, Lou Ecclestone, retire early after an investigation into what some employees described as a toxic workplace.

However, Mr. McKenzie faces a daunting challenge as the midtier exchange operator goes up against far larger foreign rivals, all of them focused on snapping up data services and trading platforms to achieve the same goal of global scale and relevance.

In his short time as CEO, Mr. McKenzie has seen the landscape reshaped by Nasdaq’s US$2.75-billion acquisition of Newfoundland-based fraud-detection software company Verafin Inc. and the London Stock Exchange’s US$27-billion purchase of data provider Refinitiv.

As CEO of a company with a $7billion market capitalization – impressive, but rival Nasdaq Inc. is five times larger – Mr. McKenzie said ,“Our balance sheet has never been stronger.”

Yet despite having money on hand and global ambitions, Mr. McKenzie said the TMX will not rush to do deals.

“With the lofty valuations today, we will likely wait for a tech market correction before we make a major acquisition,” he said.

While patience may be financially prudent, investors are signalling their impatience with a perceived slower pace of change at TMX than at peers such as Nasdaq. In a recent report, Scotia Capit al analyst Phil H ar die noted that, for many years, TMX and the U.S. exchange commanded roughly the same stock market valuation.

That began to change in January, as Nasdaq’s acquisitions added new data platforms that generate reliable revenue, and Nasdaq’s own stock price soared. Nasdaq shares now trade at a 30-per-cent premium to the valuation on TMX’s stock, as measured by the two companies’ ratios of EBITDA compared with their enterprise value.

“We see parallels between Nasdaq and TMX’s approach to using M&A to accelerate their transformation strategy,” Mr. Hardie said. “We believe Nasdaq is roughly 24 months ahead of TMX with respect to its transformation.”

Today’s TMX is already radically different from the exchange Mr. McKenzie joined 21 years ago, after a stint in the finance team at Procter & Gamble. A generation back, the fortunes of an exchange rose and fell on stock trading volumes. Today, TMX is increasingly a tech company, selling software and data, while also serving as a forum for raising money and trading.

TMX’s most recent quarterly financial results show trading brought in just 22 per cent of TMX revenues, down from 40 per cent 10 years ago. In contrast, data services and capital raising each accounted for more than a third of TMX revenues, and are growing at a double-digit pace.

“TMX underwent a significant transformation over the past five years, which we believe enhanced its resilience and growth prospects,” said Mr. Hardie. He said, over time, Mr. McKenzie will pull the trigger on acquisitions of databased businesses similar to the London-based energy trading platform Trayport, which TMX acquired in 2017 in a $931-million deal. Trayport is now growing at a 10 per cent annual clip.

But Mr. Hardie cautioned that, “with public market multiples remaining elevated across the tech sector, we believe the timeline for TM X’ s next material acquisition is uncertain and potentially extended.”

In the final weeks of his first full year as CEO, Mr. McKenzie is on the verge of setting records for welcoming new issuers to Canadian public markets, and for raising money. Through the end of October, 371 companies joined the TSX or TSX Venture exchanges.

The explosive growth in listings includes 34 companies headquartered outside Canada, including a California winemaker, a North Carolina clean-tech company and a Bermuda-based reinsurer.

The number of companies choosing to trade on TMX exchanges this year matches new listings at far larger U.S. marketplaces, such as Nasdaq and the New York Stock Exchange, and far exceeds the number of debuts on rival Asian, Australian and European exchanges.

Looking ahead, Mr. McKenzie said, “Our relationships with private companies and investment banks give us a good sense of what’s coming, and we see the strength in new listings continuing next year.”

The hot run in new listings and number of international achievements – in September, the Montreal Exchange launched derivatives trading in Asian time zones – mark an impressive debut for a CEO who wasn’t even sure he wanted the top job.

Mr. McKenzie, aged 49 and an accountant by training, was the TMX’s chief financial officer in January, 2020, when the company’s board, led by chair and investment banking veteran Chuck Winograd, asked him to step up as interim CEO.

His predecessor, Mr. Ecclestone, retired with a year left on his employment contract after the TMX launched a review of his leadership. An external investigator found Mr. Ecclestone bullied and humiliated employees. After he departed, the TMX board said in a statement it is “committed to creating a collegial culture and treating people with dignity and respect.”

At the time, Mr. McKenzie was supporting his 16-year-old son through eventually successful treatment for bone cancer. “The interim appointment worked two ways,” Mr. McKenzie said. “The organization was able to test me, while I had time to deal with my son’s health issues, then ensure I could make a difference, and had something to add.”

“John represents safe hands,” said Nicholas Thadaney, who ran the TSX as the TMX’s president of global equity capital markets before departing in 2018. “Everyone is comfortable with John, after the drama of recent years. He’s a strong, thoughtful leader.”

Part of Mr. McKenzie’s pitch to the TMX board was the need for the CEO to be “an advocate for markets and an advocate for Canada, something my predecessors did not do.” Since winning the job in the summer of 2020 – over rivals who included two other internal candidates – Mr. McKenzie has become one of a few CEOs willing to routinely take political stands.

In the recent federal election, Mr. McKenzie wrote a “call to action” for political leaders that urged Ottawa to simplify tax rules, support entrepreneurs and partner with business on environmental issues.

In an interview, he said another one of his priorities is getting Ontario’s Progressive Conservative government to make markets more efficient by adopting the national securities market passport system that allows companies to access capital across the country while dealing with only one provincial regulator. Ontario is the only province remaining outside the 16-year-old accord.

Until he began returning to the office in July, Mr. McKenzie led TMX from a basement office in his Burlington home, setting strategy on video calls against a backdrop of a Peloton bike and his kids’ guitars. Remote work was nothing new: Mr. McKenzie earned a MBA from the University of Edinburgh, but only visited the campus in Scotland to graduate.

After being named CEO, Mr. McKenzie built bonds with the TM X’ s executive team with events such as virtual wine tastings, bringing in a sommelier after delivering three interesting bottles to each of his colleagues.

In contrast to the relatively high employee turnover that marked Mr. Eccleston’s time at TMX, the company’s executive ranks have been stable on the new CEO. Mr. McKenzie has also added an experienced head of human resources–former Cineplex executive Cindy Bush–and a new chief financial officer, former CIBC banker David Arnold.

But at the same time as the TMX scouts for international acquisitions, its management team faces new challengers in domestic markets. In November, Chicagobased Cboe Global Markets Inc.–a US$14-billion company – announced it is buying Torontobased stock exchange operator NEO Exchange. It is Cboe’s second Canadian acquisition in as many years.

The six-year-old NEO Exchange targets the same innovation-economy stock listings that TMX covets, and Cboe plans to expand the platform. Mr. McKenzie said increased competition will be good for customers, and will force TMX to up its game.

“Having a quality player like Cboe in our market is positive for Canada,” he said.

Cboe has historically focused on its trading systems, and put less emphasis on the listings and capital-raising businesses that are central to the TMX’s growth strategy, Mr. McKenzie said. “With the depth of our value proposition, we feel we can remain the preferred choice for companies listing in Canada.”

And now that the TMX is past its internal upheavals, he’s confident that strategy will help it to continue to gain ground worldwide as well.