CME to buy rival CBOT for $8 billion
finance.myway.com
Tuesday October 17, 9:45 PM EDT ; By Jonathan Keehner and Dan Wilchins
NEW YORK (Reuters) - Chicago Mercantile Exchange Holdings Inc. (CME), said on Tuesday it would buy cross-town rival CBOT Holdings, Inc. (BOT) for more than $8 billion, ending a century of bitter competition to create the world's largest publicly traded exchange by market cap.
The combined exchange would create a platform better placed to expand on an international stage where European and U.S. competitors have been consolidating to gain economies of scale since the millennium began.
The merger would end more than a century of competition by combining the two largest U.S. futures exchanges -- allowing the proposed CME Group Inc. to cut costs and gain customers in such areas as interest-rate and commodities futures.
Decades of often-bitten competition for the world's top financial derivatives markets had kept the cross-town behemoths at loggerheads. So too were deep cultural roots in the competing groups of Irish, Jewish and Italian traders and others who built Chicago's world-leading futures industry over the last 150 years.
But those cultural barriers seemed to melt away.
"These are probably the two wealthiest, most powerful futures exchanges in this country, and combining them makes almost a Microsoft-type entity, where they're monstrous and hard to compete with," said Randy Frederick, director of derivatives and corporate market data at Charles Schwab & Co. in Austin, Texas.
The transaction, expected to close in mid-2007, values CBOT at $151.27 per share, a 12.5 percent premium to its closing price on Monday and nearly triple the value of CBOT shares when the exchange went public a year ago.
The combined company will operate from a single platform located at the CBOT trading floors in the heart of Chicago's downtown financial district. The CME declined to comment on any job cuts that might result from the deal.
CME, already the world's largest exchange, offers trading in interest rate, equity index, foreign exchange and agricultural futures, while CBOT, the parent of the Chicago Board of Trade, has Treasury and agricultural commodity futures. Products at both exchanges have been booming, feeding investor enthusiasm and allowing for fee increases.
About $484.4 trillion worth of futures and options contracts traded on exchanges in the second quarter, according to the Bank for International Settlements, up 30 percent from $372.4 trillion in the same quarter last year.
CME's Chairman Terrence Duffy and its CEO Craig Donohue will hold the same posts at the new company. Charles Carey, CBOT chairman, will be vice-chairman and Bernard Dan, CBOT CEO, will serve as special adviser.
SHARES SURGE, HEDGING POWERHOUSE SEEN
CBOT shares surged $17.48, or 13 percent, to close at $151.99 on the New York Stock Exchange, while CME shares rose $13.25, or 2.6 percent, to $516.50.
The announcement also lifted shares of other derivatives markets like IntercontinentalExchange (ICE) and the International Securities Exchange (ISE), as investors braced for more consolidation.
The CME and CBOT had previously considered combining, most recently in June of 2005, said Keefe, Bruyette & Wood analyst Richard Herr.
The decision to strike a deal now was prompted by "unprecedented global competition," CBOT Chairman Carey said on a conference call.
The combined entity will face competition from rivals Paris-based Euronext and Frankfurt's Deutsche Boerse as futures trading picks up in emerging markets such as Asia, according to analysts. Earlier this year, the New York Stock Exchanged merged with Archipelago.
The new Chicago exchange may also be positioned for future acquisitions, perhaps eyeing the Chicago Board Options Exchange, the largest U.S. options market, KBW's Herr said. Prior talks to combine the CBOE and CBOT ended in August.
Membership seats traded at record prices of $1.5 million at the CBOE on Tuesday.
Beginning in the merger's second full year, CME and CBOT expect to save more than $125 million annually before taxes. The deal should add to earnings within 12 to 18 months, the exchanges said.
CBOT said third-quarter profit nearly tripled to roughly $49 million from a year ago, driven in part by trade in its new electronic grain-trading platform.
Experts said the deal would be scrutinized closely by the U.S. Justice Department, but would likely win approval.
Under the terms of the deal, CBOT shareholders will receive 0.3006 shares of CME Class A common stock for each of their CBOT shares, or a roughly equivalent amount of cash.
The cash portion of the deal is subject to a $3 billion limit, the exchanges said.
Lehman Brothers and William Blair advised CME, while JPMorgan was sole adviser to CBOT. CBOT also had a special transaction committee that was advised by Lazard Freres & Co.
Reuters and CME agreed in May to set up a foreign exchange marketplace. |
