Chicago Mercantile Exchange Holdings Inc. today announced a merger with CBOT Holdings Inc., creating the world's largest global derivatives exchange. The combined company, to be named CME Group Inc., is valued at $25 billion, consisting of the CME's $18 billion and CBOT's $7 billion.
Stockholders of CME and CBOT would own about 69% and 31% of the combined company, respectively, if no CBOT stockholder elects to receive cash in the deal. "CBOT stockholders will have the right to receive 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock, or to elect an amount in cash per share equal to the value of the exchange ratio," subject to a $3 billion aggregate cash limit, according to a joint statement from the two exchanges.
Terrence A. Duffy, CME chairman, will become chairman of the combined company; Charles P. Carey, CBOT chairman, will become vice chairman; Craig S. Donohue, CME chief executive, will become CEO; and Bernard W. Dan, chief executive at the CBOT, will serve as special adviser to the combined company for one year.
The deal is expected to close in mid-2007, pending approval by shareholders of both companies and regulators.
"(The merger) will be quite beneficial to institutional investors in the ability of the exchanges to achieve economies of scale in operations, product development and marketing," Joanne M. Hill, managing director and head of equity derivative strategies, Goldman Sachs, said in an interview.
"Some of the efficiencies gained (from the merger) would be passed along to users," she added. "This (merger) has been something that people in derivatives always thought made a lot of sense but for legacy reasons thought to be too difficult to achieve. But exchange competition from outside the U.S. helped to make this (merger) happen.
Richard A. Pike, president, RP Consulting Group, which provides derivatives consulting and risk monitoring services to institutional investors, said in an interview, "These two exchanges have been leaders in innovation and I don't expect anything to change there."
CME Holdings biggest shareholders are Marsico Capital Management, which owns 13.64%, and Sands Capital Management, 5.52%; CBOT Holdings biggest shareholder is Caledonia (Private) Investments, which owns 6.5%, according to their latest proxy statements.
The $217.5 billion California Public Employees' Retirement System, Sacramento, owns 0.5% of CME Holdings, according to Brad Pacheco, CalPERS spokesman.
Steve Rodosky, executive vice president-portfolio management at PIMCO, said in an interview: "I think the biggest benefit we'll see in the long run is a lot of strategies that rely on cross-exchange trading — such as Treasury futures (on the CBOT) and an offsetting position in eurodollar futures (on the CME) — incur bid/ask spreads on both pieces. I think they will start offering a lot of these cross strategies as bundled. That should narrow bid/ask spreads.
"The risk as I see it is that these electronic platforms … will face capacity issues, when markets get real volatile and busy. So much information is coming out of these systems, there are brief periods where it shuts down; open outcry trading continues. Once they start to offer all contracts on a single platform, their capacity constraints will be more exposed. That is a technical issue they will have to deal with."
