It is finished. Shareholders of the Chicago Mercantile Exchange and the Chicago Board of Trade have approved their merger. The surviving entity, the CME Group, A CME/Chicago Board of Trade Company is now trading on the New York Stock Exchange (NYSE) and has come within a penny of $600 per share at noon on Monday.
On the Friday before the Monday July 9 vote, the CME came through with an offer CBOT couldn’t refuse, raising its offer to an exchange ratio of .375 from .350, pushing the value of their offer to 11.8 billion, ever so slightly above the Intercontinental Exchange Inc.’s unsolicited bid and slamming the door on their rival from Atlanta.
This coup de grace followed several previous moves by the CME and CBOT to sweeten the deal, including a one-time $9.14 cash dividend payable to CBOT shareholders, conditioned on approval of the merger; a post-close tender offer of $560 per share for up to $3.5 billion of shares of the combined company; greater board representation; and a revision to clearing member minimum-shareholder requirements. Combined, the moves closed the more than billion dollar gap between the ICE unsolicited bid and the CME’s previous definitive offer.
Less than an hour after the vote, The CME and CBOT announced that preliminary results indicated shareholders from both exchanges approved the merger. Former CBOT Chairman Nickolas J. Neubauer say the CME played it cards well. “What the Mercantile Exchange did was something that is a standard of good trading, namely: wait until the point at which you could actually seal the deal to make your final bid. They waited to the moment the deal could be sealed and there would be little or no opportunity for the ICE to increase their offer.”
In the run up to the July 9 shareholder vote on the potential acquisition of the Chicago Board of Trade (CBOT) by the Chicago Mercantile Exchange (CME), the action had been intense, with revised bids from both the CME and the Intercontinental Exchange (ICE) vying for the attention of CBOT shareholders and members.
Leadership from the CME and CBOT approved another revision to their definitive merger agreement on June 14, incorporating a one-time dividend of $9.14 per share for CBOT shares, and two options for CBOT full members who hold exchange right privileges (ERP) in response to ICE’s sweetened bid that came a couple days earlier. The CME also uncapped the amount on legal expenses for the ERPs.
Those moves followed the May 30 meeting ICE Chairman and CEO Jeff Sprecher had with CBOT shareholders and members, when he pointed out on several occasions that he had attempted to mirror the CME offer in every way but price so the higher value of the ICE offer could not be readily dismissed. Then ICE filed for a proxy challenge with the Securities and Exchange Commission that would permit ICE to communicate directly with CBOT shareholders and instruct them to reject the CME offer.
Less than two weeks after the May 30 meeting, Sprecher came back with an enhanced offer that addresses many of the concerns mentioned at the meeting including preferential fees for Class B-1 and B-2 members and board representation. The price was the same, which continued to be at a premium to the CME offer ($209.85 per share vs. $192.94 per share as of June 13 closing prices) but ICE added a $2.5 billion cash component. CBOT shareholders can elect to receive cash in lieu of the combined stock based on the price at the close of the merger up to $2.5 billion. If shareholders oversubscribe, cash elections will be subject to pro ration. If it is undersubscribed, ICE intends to use the remaining cash to repurchase ICE shares after the close of the transaction.
The enhanced offer came one day after the Department of Justice (DoJ) approved the CME/CBOT merger. In closing its investigation of the proposed merger the DOJ stated, “the evidence does not indicate that either the transaction or the clearing agreement is likely to reduce competition substantially.”
Although Sprecher made a favorable impression at the May 30 meeting, what was most discussed was the ERP issue that wasn’t settled to the yellow badges’ liking. Sprecher had negotiated with the Chicago Board Options Exchange (CBOE) to pay each member $500,000 for each ERP. While many members praised Sprecher for forging an agreement in the decades-long dispute, many viewed the agreement as inadequate, and several made the point that the $500,000 agreement would be a “deal-breaker, not a deal-maker.” Ron Manaster, head of CBOT member firm Eagle Market Makers, questioned Sprecher’s authority to negotiate on their behalf, a viewpoint reemphasized by the CBOT management.
Yet with the June 14 revision by the CME, the ICE offer might not be so sweet. Will the new CME/CBOT company have any claim on CBOE ownership, the leadership was asked. Craig Donohue, CME CEO said “Yes, but what we are intending to do is to facilitate the free assembly of the component parts necessary for people to realize full value from the CBOE exercise right interest, so we are not intending to as a company have any ownership interest ultimately in the [CBOE]. This is strictly a way to maximize participation from the ERP right for people who own these rights.”
The one-time payment to the members would be done on the completion of the ERP settlement.
Donohue added that “there is a market in ERPs. And so, if people put their ERPs to the combined company, either the early put option or the early cash out option we have described, then later upon the litigation outcome or settlement, we will help facilitate third parties reassembling all the component parts such that they can maximize value from the CBOE ERP utilization, not the combined company. ”
Sprecher also has said he is not surprised at the response to the ERP issue and says he is committed to resolving it, indicating the issue is open to further negotiation. He also notes CBOE Chairman and CEO Bill Brodsky probably was listening to the reaction of CBOT members. The ICE/CBOE agreement calls for each exchange to put up $332.75 million for the ERPs in either cash or equivalent stock of ICE and demutualized CBOE, which can be accessed by CBOT members holding an ERP, Class B-1 membership and 27,338 Class A shares.
The enhanced offer locks in the total figure of $665 million, regardless of how many members qualify. Meaning if less than 1331 members qualify, members could receive substantially more for the ERP. There are 1331 ERPs outstanding, and currently only 823 members own all the necessary pieces to qualify.
The CME answer to the ERP could quell member concerns, and tip interest toward the Chicago exchange merger.
Most members in attendance expected the CME to come back with an improved offer and they were right. In the end, though “people would be more comfortable with a sweetened Merc deal, but you are going to have people vote their pocket book,” says Doug Erdmier, a CBOT member.
Veteran CBOT member Lee Stern was impressed with Sprecher at the May meeting, but said preciently, “My tendency is to go with Merc because it is a known quantity. They have to come up, and I think they will. The synergies with the Merc are enormous. We know what to expect. Is the price right? No, it’s not right.” While Stern would still vote for the CME deal, he added that the ICE has been a step ahead of the CME and that there will be additional offers. “The last chapter has not been written.”
Days after the meeting, CBOT leadership sent a letter to the members, stating that, in general, member rights were better protected in the CME transaction, adding that under the CME agreement, the CBOT would designate the individuals serving as CBOT directors on the board of the combined entity.
“This is important because for a period of two years after the closing, rule changes that would impair the business opportunities of CBOT members would need to be approved by a committee that includes a majority of CBOT directors,” wrote CBOT CEO Charles P. Carey and Chairman Bernard W. Dan. The enhanced ICE offer ensures member rate advantages through 2014 and that at least five CBOT designees would remain on the board through 2014.
The proxy issue was of particular interest going into July 9. Donohue dismissed the threat stating they were focused on their merger and still believed the CME offer is superior.
