Chicago Merc to Buy Board of Trade for $8 Billion
By Darrell Hassler and Edgar Ortega
Oct. 17 (Bloomberg) -- The Chicago Mercantile Exchange agreed to buy the Chicago Board of Trade for about $8 billion, creating the largest exchange for futures contracts on stocks, bonds, currencies and commodities.
The takeover will end more than a century of competition between the exchanges, which started out trading commodities and pioneered financial futures in the 1970s. Markets worldwide have announced about $25 billion of transactions this year as trading becomes increasingly electronic and investors seek to reduce the cost of buying and selling.
``They have put together the dominant global exchange in the futures market,'' said Ryan Caldwell, an analyst at Overland Park, Kansas-based Waddell & Reed Financial Inc., which oversees about $45 billion, including shares of both exchanges. ``You have to say that they are very well positioned.''
Investors will receive 0.3006 share of Class A common stock, or about $155.26, for each share or an equal amount in cash, the companies said in a statement today. The amount was a 12 percent premium to yesterday's closing price. The company, to be called CME Group Inc., will be 69 percent owned by shareholders of the Chicago Merc, as the biggest U.S. futures market is known.
Both exchanges were members-owned institutions until the Merc reorganized and sold shares in 2002. Board of Trade members converted to a for-profit company and sold stock for the first time last year.
So-called ownership seats on the Board of Trade were valued at about $1.47 million each when the exchange sold shares last October at $54 each. The stock received by the owners is now worth about $4.15 million, based on the exchange rate in today's transaction.
Derivatives Growth
``The timing is perfect,'' said Craig Donohue, who will lead the combined company and is currently chief executive officer of the Merc. ``We're in an increasingly competitive environment.''
In June, NYSE Group Inc., operator of the New York Stock Exchange, agreed to buy Paris-based Euronext NV in a transaction now valued at $11.2 billion. The deal would connect the NYSE with bourses in Paris, Lisbon, Brussels and Amsterdam. It would also give the NYSE an entry into futures trading with the Liffe electronic market, Europe's second-largest futures exchange.
Global trading in futures and options contracts on lending rates, currencies and stock indexes increased 13 percent in the second quarter to $484 trillion from a year earlier, the Basel, Switzerland-based Bank for International Settlements said earlier this month in its quarterly review.
Futures are contracts with predetermined dates and prices to buy a commodity or pay an interest rate.
Shares of CBOT Holdings Inc., the parent of the Board of Trade, rose $17.48, or 13 percent, to $151.99 at 4:16 p.m. in New York Stock Exchange composite trading. Chicago Mercantile Exchange Holdings Inc. shares climbed $13.25, or 2.6 percent, to $516.50. They've risen 60 percent in the past year.
Grain Contracts
The Board of Trade started in 1848 trading grain contracts while the Merc was founded as the Chicago Butter and Egg Board in 1898. The Merc introduced the trading of financial futures in 1972, with currency contracts, and the Board of Trade followed with the first interest-rate futures in 1975 and Treasury-bond futures two years later.
In 1981, the Merc started Eurodollar futures for near-term interest rate contracts based on the London Interbank Offered Rate. It's now the most traded futures contract in the world. The Merc surpassed the Board of Trade as the most active U.S. futures exchange in 2001, after the government begins to issue fewer 30- year bonds, one of the Board of Trade's main products.
``It was more difficult to overcome the entrenched stickiness to open outcry at the Board of Trade,'' said Patrick Arbor, a former chairman of the Board of Trade. ``CME had no historical legacy like we had. We had this tremendous legacy, this great adherence to open outcry that took us a long time to overcome.''
Clearing Partnership
The exchanged have been working together since 2003, when the Board of Trade signed an agreement to use the Merc's clearing house, or the system that guarantees transactions will be paid and completed. The Merc clears 85 percent of U.S. futures of options on futures.
Along with Eurodollar contracts, the Merc also lists futures on foreign exchange, weather, housing, hogs, cheese and the Standard & Poor's 500 stock index. The Board of Trade has contracts on soybean, wheat, ethanol, gold, and the Dow Jones Industrial Average stock index along with Treasury futures, it's most popular contract.
The combination ``will allow the locals to trade more products,'' said Cube Financial LLC interest-rate broker Mark Hawkinson, who has traded at the Merc since 1992. ``Overall for the brokering community, it's absolutely very good.''
After the merger, all trading will take place at the Board of Trade, which is located six blocks from the Merc in downtown Chicago. The companies have a combined 2,174 employees.
Terrence Duffy, chairman of the Merc, will serve in the same capacity at CME Group. CBOT Chairman Charles Carey will serve as vice chairman and Chief Executive Bernard Dan will leave after staying on to advise for a year.
Cost Savings
The merger will help the exchanges compete with Intercontinental Exchange Inc., which owns Europe's biggest energy market and agreed last month to by the New York Board of Trade. Exchanges from the New York Stock Exchange to Frankfurt- based Deutsche Boerse AG are combining in response to investor pressure for lower trading costs.
Shares of Atlanta-based Intercontinental Exchange, which trades oil contracts, rose $4.37, or 5.7 percent, to $81.67. New York-based International Securities Exchange Holdings Inc., the second-biggest U.S. options exchange, rose $2.37, or 4.9 percent, to $51.02. The New York-based Nasdaq Stock Market Inc. rose 44 Cents to $35, while NYSE Group Inc., operator of the New York Stock Exchange, 42 cents to $73.48.
The Chicago Board Options Exchange, the biggest U.S. options exchange, is in the process of converting into a shareholder owned company from membership owned.
Profit Doubles
The combination is expected to add to earnings in 12 to 18 months after the transaction is completed, the exchanges said. The companies anticipate pretax cost savings of more than $125 million beginning in the second full year following the closing.
Chicago Board of Trade also said today that third-quarter profit more than doubled on increased trading volume across all product categories, higher average exchange fee rates and lower costs. Net income climbed to $48.8 million or 92 cents a share, from $19.8 million, or 40 cents, a year earlier. Revenue rose 45 percent to $163 million.
Lehman Brothers Holdings Inc. and William Blair & Co., and law firm Skadden, Arps, Slate, Meagher & Flom LLP advised the CME, while JPMorgan Chase & Co. and Mayer, Brown, Rowe & Maw LLP advised CBOT. Lazard Ltd. and Latham & Watkins LLP advised a `special transaction committee' of the CBOT.
The transaction will likely be completed by the middle of 2007, pending regulatory approval, the companies said. The Commodities Futures Trading Commission is the industry's self- regulating agency.
``We've been very well advised by the Department of Justice on antitrust issues, and we're not expecting any regulatory issues,'' Donohue during a conference call with investors.
To contact the reporter on this story: Darrell |
