Tuesday, October 17, 2006
FT.com / Companies / Americas - CME in $8bn deal with rival CBOT
The Chicago Mercantile Exchange on Tuesday announced plans to merge with cross-town rival the Chicago Board of Trade in a $8bn deal that will intensify consolidation pressure in the financial exchange sector.
The bold move comes two years after the CBOT rejected an approach in favour of a stock market listing.
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It will increase pressure on the New York Stock Exchange to seal a transatlantic deal with Euronext, the Paris based pan-European stock and derivatives exchange.
The proposed deal would create the world’s largest futures and options exchange and provide a powerful platform to expand the two companies’ existing plans to expand into fast-growing areas such as credit derivatives and foreign exchange.
The CME had steered clear of the recent consolidation in the exchange sector in favour of alliances and organic growth, and had been wary of overpaying at a time when valuations have been inflated by deal activity.
However, chief executive Craig Donohue – who had looked to buy Euronext and the smaller IntercontinentalExchange – has opted for a domestic deal to counter the expansion of the New York Stock Exchange’s move into derivatives the threat of an all-European deal involving Euronext and Frankfurt’s Deutsche Börse.
In a statement, the CME said the deal would create one of the world’s largest and most liquid market places, with average daily trading volume approaching 9m contracts, representing approximately $4,200bn in notional value.
The combined company, to be known as CME Group, would provide customers efficient, global access to a wide array of benchmark exchange-traded derivatives based on US interest rate yield curve, equity indexes, foreign exchange, agricultural and industrial commodities, energy and alternative investment products such as weather and real estate, it added.
Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day prior to the announcement of the merger, the combined company is valued at $25bn.
Terry Duffy, CME chairman, said: “We are very pleased to announce this strategic merger today. We have enjoyed a strong, productive relationship with CBOT for a number of years, including our historic clearing agreement in 2003 in which CME began clearing all CBOT trades. This merger takes us to the next level in the evolution of our high-growth business.”
Bernard Dan, CBOT chief executive, welcomed the deal, which he said created the world’s most diverse, global derivatives exchange.
Both highly-regarded management teams will stay on, with Mr Donohue retaining the chief executive post and Mr Dan remaining to oversee the Board of Trade’s business.
Under the terms of the deal, CBOT shareholders will have the right to receive 0.3006 CME shares for every CBOT share held, or cash equal to the value of the exchange ratio based on a 10-day average of closing prices of CME common stock at the time of the merger. The cash portion is capped at $3bn.
The proposed deal will face significant regulatory scrutiny, though there is little overlap in the products traded by the two exchanges.
However, their common clearing link and expansion plans come at a time when banks and other users have expressed concern about the pricing power of the dominant exchanges.
A number of banks have already invested in competing options exchanges.
The companies said they exp[ected the deal to be accretive to earnings in 12 to 18 months after closure, with pre-tax cost savings put at more than $125m beginning in the second full year following the closing
The bold move comes two years after the CBOT rejected an approach in favour of a stock market listing.
ADVERTISEMENT
It will increase pressure on the New York Stock Exchange to seal a transatlantic deal with Euronext, the Paris based pan-European stock and derivatives exchange.
The proposed deal would create the world’s largest futures and options exchange and provide a powerful platform to expand the two companies’ existing plans to expand into fast-growing areas such as credit derivatives and foreign exchange.
The CME had steered clear of the recent consolidation in the exchange sector in favour of alliances and organic growth, and had been wary of overpaying at a time when valuations have been inflated by deal activity.
However, chief executive Craig Donohue – who had looked to buy Euronext and the smaller IntercontinentalExchange – has opted for a domestic deal to counter the expansion of the New York Stock Exchange’s move into derivatives the threat of an all-European deal involving Euronext and Frankfurt’s Deutsche Börse.
In a statement, the CME said the deal would create one of the world’s largest and most liquid market places, with average daily trading volume approaching 9m contracts, representing approximately $4,200bn in notional value.
The combined company, to be known as CME Group, would provide customers efficient, global access to a wide array of benchmark exchange-traded derivatives based on US interest rate yield curve, equity indexes, foreign exchange, agricultural and industrial commodities, energy and alternative investment products such as weather and real estate, it added.
Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day prior to the announcement of the merger, the combined company is valued at $25bn.
Terry Duffy, CME chairman, said: “We are very pleased to announce this strategic merger today. We have enjoyed a strong, productive relationship with CBOT for a number of years, including our historic clearing agreement in 2003 in which CME began clearing all CBOT trades. This merger takes us to the next level in the evolution of our high-growth business.”
Bernard Dan, CBOT chief executive, welcomed the deal, which he said created the world’s most diverse, global derivatives exchange.
Both highly-regarded management teams will stay on, with Mr Donohue retaining the chief executive post and Mr Dan remaining to oversee the Board of Trade’s business.
Under the terms of the deal, CBOT shareholders will have the right to receive 0.3006 CME shares for every CBOT share held, or cash equal to the value of the exchange ratio based on a 10-day average of closing prices of CME common stock at the time of the merger. The cash portion is capped at $3bn.
The proposed deal will face significant regulatory scrutiny, though there is little overlap in the products traded by the two exchanges.
However, their common clearing link and expansion plans come at a time when banks and other users have expressed concern about the pricing power of the dominant exchanges.
A number of banks have already invested in competing options exchanges.
The companies said they exp[ected the deal to be accretive to earnings in 12 to 18 months after closure, with pre-tax cost savings put at more than $125m beginning in the second full year following the closing
