While industry regulators and professionals have grumbled quietly about the impending merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), it took the InterncontinentalExchange (ICE) finally to issue an actual challenge to the deal, bidding $9.9 billion in stock for the CBOT, compared with the CME’s bid of $8 billion in October. That bid is currently valued at approximately $8.9 billion. The reciprocal break-up fee in the CME/CBOT merger is $240 million, according to the CME transaction summary.
While the ICE bid contains the same terms offered by the CME, there are several important differences. The ICE bid cedes 51.5% of the stock in the combined entity to CBOT shareholders, whereas in the CME bid former CBOT members are minority shareholders. The ICE bid preserves the CBOT metals complex, which cannot migrate to the CME Globex trading platform because of a non-compete agreement with the New York Mercantile Exchange and the COMEX, which have listed electronically traded contracts on Globex. The ICE bid would also preserve the CBOT’s global presence through the Joint Asian Derivatives Exchange (JADE), which the CBOT created with the Singapore Exchange (SGX). And perhaps most important, the board of directors of the merged ICE/CBOT entity would include current CBOT board members. Jeff Sprecher, ICE CEO, would be the CEO of the new company, which would be headquartered in Chicago.
“The price of the CBOT just went up and that is good for CBOT shareholders,” says the head of a Chicago-based futures commission merchant. “The Merc has to compete.” Shares in the CBOT were up more than $28 today, closing at $194.95. Yesterday’s close was $166.09.
The word on the CBOT floor is that CME will have to increase its bid, according to Doug Blake and John Caruso, market strategists for Lind-Waldock. “[The ICE offer] is over the top. The CBOT can’t just turn it down,” Caruso says.
Blake agrees. “Money talks and we hope the CME ups its bid, but the CBOT really has to look out for the best fit overall, relationship-wise,” he says, pointing out that the CME-CBOT merger may be a smoother transition in terms of platforms.
Caruso adds that the CME and CBOT have had a long-running relationship and the CBOT may not want to hurt it. “I hope the CME does up its bid because the CME-CBOT merger would create the largest exchange in the world and the CBOT has to be aware of that,” says a CBOT options trader.
At the Futures Industry Association conference in Boca Raton, Fla., Phupinder Gill, CME president and chief operating officer joked, “At our party, our drink section will not be serving any ice.” To which Sprecher retorted, “We will bring the ice, because we look for opportunities that other exchanges miss.”
In addition, Sprecher says that a merger between the CBOT and the ICE would likely not arouse objections on the grounds of unfair competition, as the CME/CBOT deal has. The proposed CME/CBOT merger would create an entity that, including the New York Mercantile Exchange’s (Nymex) electronically traded contracts currently hosted on the CME’s Globex trading platform, trades 86% of the futures contracts in the United States, and 35% globally. This has lead to objections by large broker dealers and other derivatives exchanges, including Eurex and the New York Stock Exchange, which is near completing a merger with Euronext.Liffe. Sprecher says he does not expect any problems with the Department of Justice, which is currently examining antitrust issues resulting from the proposed CME/CBOT merger. “It’s a very clean deal,” Sprecher says.
In addition to creating greater value for CBOT shareholders, the issue of the CBOE exercise right privilege (ERP) is at the root of a major dispute between the CBOE and the CBOT. The CBOE is arguing in the courts and to the Securities and Exchange Commission that a merger between the CBOT and the CME would negate the ERPs owned by former CBOT members, because post merger no CBOT members would exist and therefore no CBOT members would qualify for the ERP. CBOT members are arguing for “full financial consideration” in a future initial public offering by the CBOE, equating the ERP with CBOE membership and demanding equity in the CBOE. The contested equity issue is a major hindrance to the CBOE in its quest to demutualize, issue common stock and sell shares to the public. Most recently, the CBOE repurchased an ERP for $127,000, and a full CBOE membership sold for $2.7 million.
“We would structure a deal to preserve and protect the status quo,” Sprecher says, and CBOT members would potentially retain the ERP.
By Chris McMahon, Dan Collins and Yesenia Salcedo
