After years of frustrated efforts, the Chicago Mercantile Exchange and the Chicago Board of Trade have finally reached a definitive agreement to merge the exchanges, creating the CME Group Inc. CME Group Inc. will be the largest derivatives exchange in the world, valued at $25 billion USD, with an average daily trading volume near 9 million contracts per day and representing $4.2 trillion in notional value
The deal values the CME at $18 billion and the CBOT at more than $7 billion, and could close in mid 2007. CME stockholders will own 69% of the combined company and CBOT shareholders will own 31%. CBOT stockholders will have the right to receive 0.3006 shares of CME class A common stock or receive cash equal to a 10-day average of the CME common stock, not exceed $3 billion. The merger will have no affect on trading rights or membership and will not affect the membership/ownership and trading right dispute between the CBOT and the Chicago Board Options Exchange.
“Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets,” said Craig Donohue, CME Chief Executive Officer. “As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform.
Beginning in the second full year following the close of the deal, which is expected in mid 2007, the new company is expected to save $125 million pre tax, based on technology, administrative and trading floor-related cost reductions, the consolidation of the trading floors, the merging of technology operations and moving CBOT contracts to the CME Globex Trading platform. Until then, the exchanges will continue to operate independently.
The trading floor of the combined company will be in the Chicago Board of Trade building. Terrence A. Duffy, chairman of CME, will be chairman of the combined organization. Charles P. Carey, chairman of CBOT, will be vice chairman; Craig S. Donohue, CME CEO, will be CEO. Phupinder Gill, will remain CME’s president and COO. Bernard W. Dan, CBOT CEO, will remain in his current position, responsible for CBOT’s activities, products and customers until the transaction is complete. He will then be a special advisor to the combined company for one year. The board of directors of the combined company initially will be comprised of 29 directors, 20 directors designated by CME and 9 directors by CBOT.
“It was a long time coming,” said Leo Melamed, CME chairman emeritus and the man who perhaps has worked longest, if not hardest, at pushing Chicago’s two futures exchanges together. C.C. Odom, a longtime CBOT board member addressing Melamed in front of the media referred to the 1976, 1882 and 1987 negotiations. Though Melamed saw it as a culmination of previous effort, he credited the hard work and friendship between current exchange chairman Terry Duffy and Charlie Carey for finally getting it done. “This represents the ultimate of a Don Quixote impossible dream,” Melamed said, adding, “This fulfilled a destiny that will solidify Chicago as the capital of derivatives and risk management.”
In 2003, the two signed a clearing agreement that created approximately $1.8 billion in savings for clearing member firms of each exchange. The deal, at the time, which ended the CBOT’s 78-year relationship with Chicago Board of Trade Clearing Corp., was thought to be a precursor to an eventual merger.
The CBOT’s technology agreement with Atos Euronext Market Solutions (AEMS), which provides the platform for the e-Cbot, runs through November of 2008. Bernie Dan said that as that deadline approaches the new Chicago exchange would make a determination regarding an electronic platform for CBOT products.
