At first, the planned union between the Chicago Mercantile Exchange and the Chicago Board of Trade seemed headed to the altar without a glitch, promising a trader-friendly derivatives powerhouse with the full spectrum of U.S. interest rate futures and most equity index contracts on one platform. But a higher, unsolicited bid from IntercontinentalExchange Inc., the rising Atlanta-based energy market, turned a sure thing into a cliffhanger that required all of CME Chief Executive Officer Craig Donohue’s skills to seal the deal with a last-minute sweetened offer.
An experienced lawyer, Mr. Donohue knew that in court you plead the facts or the emotions. With the CME-CBOT alliance, Mr. Donohue believed he had both the facts — a risk-free, seamless integration anchored in a common clearinghouse — and the emotions — the future of Chicago, a tight-knit community, as a major financial center.
Yet, one business day before the July 9 deadline for the shareholders of both exchanges to vote on the proposed merger, the CME’s mostly stock offer of 0.35 CME share for each CBOT share was $1.3 billion short of ICE’s bid. Australian hedge fund Caledonia Investments Pty. Ltd., the single largest CBOT shareholder, had already voted against the CME-CBOT deal, according to an exclusive by Crain’s Chicago Business, a sister publication of Pensions & Investments.
Mr. Donohue recounts how the deal went down to the wire and how the new CME Group Inc., of which he became CEO, might be looking at its next option.
The CME stock was pressured by prospects that you would have to raise your bid. You waited until the last Friday (July 6). Do you play poker? I don’t play any poker, if you’re talking about card games. But I play a different kind of poker, and I’m a pretty good poker player in that milieu. It boiled down to a combination of timing and skills regarding the judgment we made here collectively. We have some very good card players on our team here at CME.
There was a dilemma. We felt that, while the CME stock price could reflect the transfer of increased value to the CBOT, this was likely to be offset to some extent by the market rewarding us for getting the deal done and enhancing the long-term growth potential of the company. At 0.375 CME share, we got the support of shareholders, in particular Caledonia. Had we done that earlier, the market would have been wondering whether we were not yet done. The fact we did it on the Friday and said this was our best and final offer made the difference.
We made the decision Thursday night, early Friday morning. The board convened into the very early hours. We were on the phone with Caledonia until 2 a.m. Friday when we reached an acceptance of the revised terms.
When you were conducting those negotiations with Caledonia, did you know or have a strong sense that you were not getting the CBOT shareholders’ votes you needed? The trend in voting was very positive in terms of the ratio of votes for vs. votes against. That was not our concern. But there was a very poor voter turnout. If the turnout was only 60% of all the votes, the burden of getting 50% of all outstanding CBOT Class B shares was much higher. It was the nature of the game.
It truly was a Texas Hold’em poker game. Traders and folks like Caledonia were withholding their votes to create as much uncertainty as possible, and they did a very good job.
Caledonia indicated they thought we could pay more. By far, they thought the best merger for the Board of Trade was with the CME, but they viewed fair value at 0.40 CME share for each CBOT share, not at our offer of 0.35. It was a signal to other traders who understood the play Caledonia was in and waited until they got to the midpoint at 0.375 CME share.
It was an issue of timing, getting the vote turnout, getting Caledonia’s support, which immediately led to a flood of support.
Given that Caledonia played such a role in the merger, what do you think of the role hedge funds play in the global exchange sector? As shareholders, hedge funds are activists. This can be very positive because this forces management to be very responsive. On the negative side, hedge funds can be too short-term focused, and you can’t run a business as well because the short-term focus does not facilitate the long-term development of the business.
How did you convince the Department of Justice that the CME-CBOT merger did not raise antitrust issues? We emphasized in the press that the market is global, that we do compete globally. It’s not just our opinion, it’s a fact. We also made the case that we compete with the much larger and faster growing over-the-counter markets.
The NYSE-Euronext merger happened in the middle of our DOJ review. Deutsche Boerse’s merger agreement with the International Securities Exchange came late in our review. This likely helped the Department of Justice to reach the conclusion that the globalization of markets of an epic proportion was coming fast.
We’re moving away from viewing stock exchanges as national institutions, which is very positive. It’s a real change we have seen. People want to be part of the large consolidation of that marketplace.
CBOT members — if they were to be successful in their exercise rights claim — could have a 65% stake in the Chicago Board Options Exchange. This may help CME Group set its eye on the world’s largest options exchange. We pledged a minimum of $250,000 to CBOT members who want to transfer their exercise rights privilege to us, as a company. This is the minimum guarantee of $250,000, no matter what is the outcome of the CBOT case against the CBOE, which remains in a Delaware court. If (CBOT members) want to continue to litigate, we are a $30 billion company; we can fund the legal expenses.
