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Buyout by Merc moves forward

Tue., July 10, 2007

CHICAGO – The Chicago Board of Trade got the final go-ahead from shareholders Monday to join forces with its longtime rival in an $11.9 billion deal that will end its 159 years of independence but could make the combined all-Chicago company the world’s biggest exchange.

The offer by Chicago Mercantile Exchange Holdings Inc. to buy one of the nation’s oldest and largest financial institutions won approval at shareholder meetings for both companies after four months of back-and-forth bidding involving upstart IntercontinentalExchange Inc.

The two exchanges said the deal should close within days, creating a new firm named CME Group, a Chicago Board of Trade company.

The vote totals weren’t immediately available, but executives said preliminary indications were that it passed easily.

“We are pleased that shareholders of both companies have demonstrated support for this groundbreaking merger,” said CME Executive Chairman Terry Duffy. “The combination of CME and CBOT creates a strong international company better positioned to compete with growing global exchanges and the over-the-counter market.”

A majority became assured only after the Merc raised its offer a third time Friday to win over CBOT’s largest and most influential shareholder, Australia-based Caledonia Investments. Caledonia swiftly joined four proxy advisory firms in recommending an approval.

ICE quietly conceded in the face of the last bid by Merc, leaving its most recent proposal valued at about $11.7 billion.

Jerome Israelov, a wheat trader for 17 years, said going with smaller, Atlanta-based ICE would have been too risky.

“There’s been a consensus for awhile that this (the CME-CBOT combination) was the right marriage, and the only impediment was price,” he said. “I don’t think it’s quite sunk in yet that it’s essentially the end of an institution that’s been here for a century and a half.”

Executives of the Merc and Board of Trade, located six blocks apart in downtown Chicago, first agreed to combine in October before ICE jolted their plans with a rival offer.

Pairing the Merc and Board of Trade would create the world’s largest one-stop futures and options market for everything from interest rates to pork bellies, and could make it the world’s No. 1 exchange of any kind by market value, rivaling or outpacing Germany’s Deutsche Borse and the New York Stock Exchange.

Its blockbuster size has prompted concerns it could force up trading prices and claim a monopoly in derivatives – contracts based on the performance of an underlying financial asset, index or other instrument. But federal regulators signed off on the proposed combination in June after months of scrutiny.

The Board of Trade was founded in 1848 for farmers to buy and sell grain, and invented the futures contract in 1865. It has remained prosperous even as it was surpassed by the crosstown Merc and Switzerland- and German-based Eurex in trading volume.

The soaring growth of its financially based contracts, including those based on the Dow index and on bonds, made it a takeover target as exchanges consolidate and try to cut costs.

“Today’s votes clear the way for us to combine our two great exchanges and begin delivering the value of the merger to our customers and shareholders,” said CBOT Chairman Charles P. Carey.

The 109-year-old Merc, which has gone far beyond its own trademark agricultural futures to offer contracts on everything from the S&P 500 to the weather, put forward an initial offer of $8 billion last October that has risen amid the bidding with ICE and escalating stock values.

The huge dollar values batted back and forth in bidding since March reflect the growing popularity of derivatives trading as a tool for risk managers and speculators.

Harlan Krumpfes, an ag trader at the Board of Trade since 1975, agreed with those who called the move inevitable.

“There’s a tremendous growth opportunity in this whole industry,” he said. “The trend of the industry is you have to get bigger or get out.”

Morningstar analyst Patrick O’Shaughnessy said the latest buyout trend also was touched off by exchanges going public in recent years, increasing the pressure to be innovative and cut costs instead of running companies solely to maximize profits for floor traders.

“Electronic trading has spread a lot of growth,” O’Shaughnessy said. “The futures exchange industry is very covetable right now. It’s a lot more attractive than the stock exchange or even the options exchange industries.”

CBOT embraced the bid by the Chicago Mercantile Exchange’s parent and did not fight for its continued independence because it doesn’t control the technology for its trading platform or the clearing services needed to process trades.

“We look forward to building on our shared legacies of superior customer service, product innovation and industry leadership to capitalize on the terrific growth opportunities we see in this global marketplace,” CBOT Chairman Charles Carey said.

The CBOT board of directors has always preferred the Merc’s offer, maintaining that its trading technology is superior to ICE’s and that the two Chicago exchanges would be able to combine operations more efficiently. Some job cuts are expected.

Shares of CBOT fell $1.18 to $222.82 Monday, while Merc shares declined $4.22 to $570.58. ICE shares rose 69 cents to $156.78.


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