CME counters ICE's offer for the CBOT:
Merc tries to freeze out ICE
Raises bid for CBOT; Chicago exchanges say merger on track
By Robert Manor, Tribune staff reporter. Tribune reporter James P. Miller contributed to this report
Published May 12, 2007
The Chicago Mercantile Exchange on Friday raised its offer to buy the Chicago Board of Trade, hoping to head off a higher bid by IntercontinentalExchange Inc.
In jointly announcing the new $9.93 billion all-stock offer, the Merc and Board of Trade indicated their proposed merger remains on track, with the CBOT saying its future would be more secure alongside the Merc.
The Board of Trade formally rejected the bid from Atlanta-based IntercontinentalExchange, or ICE, which has been on the table since March 15.
Still rivals and once bitter adversaries, the Merc and Board of Trade see a future together in which they can compete more strongly in what has become a global electronic trading industry.
But Wall Street investors may have other ideas about what happens next.
Shares of CBOT Holdings Inc. gained $7.35 Friday to close at $201.35, which gives it a market value of $10.64 billion. That is higher than the value of either the bid from the Merc or ICE, based on Friday's closing share prices. Further, ICE's rejected bid, valued at $10.55 billion, remains worth more than the Merc's new one.
When shares of a buyout target trade above the offering price, it means that Wall Street investors are betting a higher offer will surface. And certainly some Board of Trade shareholders would be unhappy with a deal in which the Merc wins in a transaction valued at less than ICE's offer.
The Merc "is really pushing hard to get this deal done," said David Easthope, senior analyst with the securities and investments practice at Celent, a Boston-based financial research and consulting firm.
"However, there is plenty of time for the ICE to improve on its bid as well," Easthope said. "All in all, it is an enviable situation for CBOT stockholders."
The Merc originally offered a deal under which CBOT holders would receive 0.3006 Merc shares for each of their shares. Its sweetened bid raised the exchange ratio to 0.35-to-1; at Friday's closing price of $536.30, the Merc's offer would provide CBOT stockholders with $187.71 a share.
ICE's existing stock-swap offer of its 1.42 shares for every CBOT share would give CBOT holders a richer $199.58 a share, based on Friday's closing price of $140.55.
To further improve its offer, the Merc promised to buy back $3.5 billion of the merged exchange's stock at $560 a share, a move that would likely boost its value.
Fast-growing IntercontinentalExchange insists its bid is the better one. "ICE continues to believe the combination of CBOT and ICE offers CBOT shareholders and members greater immediate and long-term value as well as better growth prospects than its acquisition by CME," the company said.
But the leader of the Board of Trade believes otherwise.
"A combination with Chicago Mercantile Exchange presents significantly less integration risk," said CBOT Chairman Charles Carey.
The Merc and CBOT share a service to clear trades, a back-office function essential to operations. ICE could sever that relationship, which makes some traders uncomfortable, and ICE has much less experience in clearing.
The Merc and CBOT are also in the process of evolving from face-to-face trading in the pits to electronic trading. ICE was established as an all-electronic exchange.
"There is hugely broad support from members of both exchanges," said Merc Chairman Terrence Duffy.
Alaron Trading Corp. trades actively at the CBOT, and Vice President Phil Flynn has been following the merger issue closely.
"The Board of Trade always wanted to deal with the Merc," Alaron said. "When ICE came in, [CBOT] had to show interest because it was more money, and they are traders. The bottom line is that they know the Merc can handle the clearing."
James Bower, president of Bower Trading Inc. and a trader since 1974, said he would rather see the two Chicago exchanges become one. Together they would form the largest futures-trading exchange in the world.
"The exchanges are going to go up against a lot of global competition," Bower said. Turning two very large exchanges into a single giant would make it more competitive, he said.
Still, the higher value of ICE's offer presents a potential obstacle to the CBOT-Merc merger.
"I'm voting against [the Merc offer]," Steve Fanady, a CBOT shareholder, told Bloomberg News. Fanady objected to the Merc's plan to raise its share price with the stock buyback.
"What they're proposing to do is to use smoke and mirrors to get a value that the market has already given me," Fanady said. "That's called fuzzy math, and I'm not voting for it."
Another potential barrier remains to a merger between CBOT and the Merc. The Justice Department could object on antitrust grounds, as the combined exchanges would dominate futures trading in interest rates and some other financial instruments. The department is examining the merger's implications.
Randal Picker, a professor of law at the University of Chicago Law School, said that may not be an insurmountable obstacle. Picker said merging companies can shut down businesses, sell off assets and take other steps to satisfy government antitrust concerns.
Nor is the government necessarily going to be hostile to the merger.
"When you think of these as worldwide markets, there is a growing sense that the U.S. is not going to use its regulations to [disrupt] competitiveness," Picker said. "We are competing with London and Tokyo."
CBOT and Merc shareholders are scheduled to vote July 9 on the proposed merger.
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rmanor@tribune.com
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Competing offers
$9.93 billion
Value of the Chicago Mercantile Exchange's sweetened offer for Chicago Board of Trade shareholders.
$10.55 billion
Value of IntercontinentalExchange's existing stock-swap offer for CBOT shareholders.
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