CME-CBOT merger

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The merger between cross-town rivals Chicago Mercantile Exchange and the Chicago Board of Trade was approved by shareholders and completed on July 12, 2007. The plan for the merger was announced on October 17, 2006, and it was far more hard fought and expensive than originally intended.

Ultimately, the CBOT stockholders received $11.3 billion for the exchange[1]. The CME's initial proposal valued CBOT at $7 billion[2].

Earlier attempts between the two exchanges to reach a merger agreement had been stonewalled by floor traders, who at the time owned each of the exchanges. However, CME became a publicly held for-profit corporation in 2002, the CBOT in 2005, creating a common currency for valuing the exchanges and the interests of members thus paving the way for a merger.

Best and Final Transaction Structure

The structure and value of the deal were repeatedly revised in the final weeks before the shareholder vote. Ultimately CBOT shareholders received an exchange ratio of 0.375 shares of CME Holdings common stock (up from a previous offer of 0.350) for each share of CBOT Holdings common stock[3]. Then-current CBOT shareholders also received 36 percent of the outstanding shares of the combined company, up from approximately 35 percent. In addition, CBOT members received a pre-close special dividend by CBOT Holdings to its shareholders of $9.14 per share and the CME offered a post-close tender offer for up to $3.5 billion of shares of the combined company, (approximately 11.4 percent) at a fixed price of $560 per share.

CME also removed a $15 million expense cap on legal expenses related to the Chicago Board Options Exchange exercise rights and offered a minimum guarantee of $250,000 for those rights[4].

Initial Transaction Structure

In the initial offer, CBOT stockholders would have received 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock (the exchange ratio) or to elect an amount in cash per share equal to the value of the exchange ratio based on a ten day average of closing prices of CME common stock at the time of the merger.

The cash portion of the consideration was subject to a $3 billion aggregate limit and would be subject to proration if cash otherwise payable would exceed that limitation. If no stockholders would have elected to receive cash, stockholders of CME and CBOT would have owned approximately 69 percent and 31 percent of the combined company, respectively, and CME would issue approximately 15.9 million shares.

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 was valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion). Core trading rights, membership or clearing privileges would not have changed at either exchange.

ICE Proposal to Combine with CBOT Holdings

While never a foregone conclusion, the outcome of the CME-CBOT merger was called into question on March 15, 2007 when the Intercontinental Exchange Inc. placed an unsolicited bid for the CBOT[5] during the FIA Boca International Futures Industry Conference, delivering the written offer by sliding it under the doors of CBOT's then President and CEO Bernard Dan and then Chairman Charles P. Carey’s hotel rooms. The CME/CBOT joint presentation to describe the benefits of the merger, scheduled for later that morning, was canceled.

ICE initially offered CBOT Holdings Class A common stock 1.42 shares of ICE Class A common stock for each share of CBOT Holdings Class A common stock, besting the CME offer by a billion dollars. In addition, the ICE offer purported to preserve the CBOT brand and metals futures complex, decrease the potential anti-trust issues and claimed to preserve CBOT members’ exercise rights at Chicago Board Options Exchange.

Five days later, the CBOT postponed the April 4, 2007 special meeting of CBOT members and shareholders to vote on the merger[6]. That same day, the CME scheduled a meeting of CBOT members for March 22, 2007 and shareholders in an attempt to shoot down the ICE proposal[7].

CME asserted:

  • ICE's estimated synergies appeared exaggerated
  • ICE's proposal poses significant execution and integration risks that could have adversely affected customers and shareholders
  • ICE's proposal was predicated on CBOT shareholders accepting a weaker currency
  • ICE's proposal would limit CBOT's comparative future growth potential and value creation opportunities

In late May, Jeff Sprecher, ICE’s CEO increased his offer for CBOT to $10.9 billion and included a proposal to end the decades long battle for CBOE exercise rights owned by CBOT members[8]. In July 2007, Sprecher's final offer valued the CBOT at $11.8 billion.

Done Deal

On June 11, 2007, the U.S. Department of Justice approved the merger[9]. CME and CBOT shareholders approved the merger on July 9, 2007.[10].

By late 2008, the CME had closed its trading floor and moved its remaining pits to the CBOT building.[11].

Member Privileges The formation of CME Group did not result in any change to trading privileges for CME and CBOT members.[12] CME members can trade CME products at reduced rates directly from the trading floor, and CBOT members are able to enjoy the same benefits on CBOT products only. To cross-trade products offered by the individual exchanges belonging to CME Group, participants need to have memberships at each of the individual exchanges. Additionally, CME and CBOT membership types, fees and requirements vary, as do terms for purchasing and leasing memberships.

Operational Integration. A massive integration plan, incorporating operational, staffing and communication issues with customers, stockholders and staff began, to the extent allowable by the U.S. Department of Justice, a number of months before the merger of CME and CBOT was completed in July 2007. Though the CME Group headquarters is located at 20 South Wacker Drive in Chicago, all trading floor operations moved from the CME trading floor to the CBOT floor at 141 West Jackson by mid-2008.

In addition, in January 2008 all legacy CBOT products migrated successfully to the CME Globex platform from e-cbot.[13]. CBOT had already moved clearing of all trades to CME Clearing from its legacy clearing provider, the Board of Trade Clearing Corp., in 2003; thus, this was one huge operational hurdle that did not require consideration during the migration.

References

  1. CBOT Shareholders Approve $11.3 Billion CME Merger (Update3). Bloomberg.
  2. CME & CBOT to Merge, Creating $25 Bil. Premier Global Derivatives Exchange. CME Group.
  3. CME and CBOT Complete Merger Creating the Leading Global Financial Exchange. CME Group.
  4. CME and CBOT Revise Merger Agreement to Provide Increased Value to CBOT Shareholders. CME Group.
  5. ICE Proposal to Combine with CBOT Holdings, The Right Alternative: A Focus on Growth and Innovation Investor Presentation, March 15, 2007. The Intercontinental Exchange.
  6. Chicago Board of Trade Postpones Special Meeting for CME Merger. CBOT.
  7. CME Outlines Why ICE Proposal Is Inferior to CME/CBOT Merger Agreement. CME.
  8. ICE's Sprecher Will Bypass CBOT Board in Takeover (Update2). Bloomberg.
  9. DOJ gives green light to CME-CBOT mega-exchange. Reuters.
  10. CME and CBOT Shareholders Approve Merger. CME.
  11. CME-CBOT Merger Creates World's Biggest Derivatives Exchange. Seeking Alpha.
  12. "Membership at CME Group”. CME Group.
  13. "Moving from e-cbot to CME Globex–Product Migration; What You Need to Know: Quick Reference for Traders,” 1/7/08. CME Group.