CME Seen Next Predator as Speculators Mull NYSE: Real M&A
IntercontinentalExchange is purchasing NYSE Euronext in an $8.2 billion transaction announced yesterday to expand into European derivatives as well as U.S. stocks and options. Even before the bid, Atlanta-based IntercontinentalExchange was forecast to boost sales almost three times faster through 2015 than CME, which has suffered from less trading of interest-rate futures, according to data compiled by Bloomberg.
The increasing threat from IntercontinentalExchange could compel CME to attempt to make an acquisition, Aite Group LLC said. CME, like IntercontinentalExchange, has expanded in the past decade through deals, buying the Chicago Board of Trade and New York Mercantile Exchange and unsuccessfully trying this year to purchase the London Metal Exchange. Nasdaq OMX (NDAQ) Group Inc. rallied the most since July yesterday, while CBOE (CBOE) Holdings Inc. rose to a 29-month high, indicating takeover speculation, Caldwell Securities Ltd. said.
“CME should be wary of this combination because it looks to be pretty formidable,” Michael Holland, who oversees more than $4 billion in assets as chairman of New York-based Holland & Co., said in a phone interview. “The ICE people have done a very smart thing. CME should be concerned.”
Laurie Bischel, a spokeswoman for Chicago-based CME, declined to comment on potential deals, as did New York-based Nasdaq OMX’s Joseph Christinat and Chicago-based CBOE’s Gail Osten.
Founded in the 19th century, CME’s business spans agricultural, energy, metal and financial futures linked to things such as corn, oil, gold and interest rates. The $17.1 billion company expanded in the past decade through acquisitions, cementing its dominance in futures with the Chicago Board of Trade and New York Mercantile Exchange owner Nymex Holdings Inc.
If the deal for NYSE Euronext is completed, in 11 years IntercontinentalExchange Chief Executive Officer Jeffrey Sprecher will have transformed an oil exchange in London into the world’s second-biggest futures market by volume, according to data compiled by the Futures Industry Association.
“What this means for the CME is a restructuring or reorganization of their chief competitors,” James Angel, a finance professor at Georgetown University in Washington, said in a phone interview. “ICE has been a thorn in the CME’s side for a number of years, and now they’re going to be bigger and have even more products to compete against the CME.”
Interest-rate futures are CME’s biggest business, accounting for 27 percent of clearing and transaction fees revenue in 2011. NYSE Euronext’s Liffe market offers the contracts in Europe, meaning Sprecher is buying a business that puts him in more direct competition with CME. While trading has slowed with central banks holding benchmark lending rates at record lows since the global financial crisis, IntercontinentalExchange’s purchase may be a sign it expects a rebound, according to Stifel Financial Corp.’s Matthew Heinz.
“The market’s view is that this enhances the potential competition around CME’s business within interest rates,” Heinz, a Baltimore-based analyst with Stifel, said in a phone interview. “But I see it a little bit different. To me, this is a confirmation that Jeff Sprecher -- who’s tended to be a pretty smart guy about these things -- believes there’s going to be a turn in the interest-rate business eventually and he wants to be there for it.”
IntercontinentalExchange is also expanding into U.S. stock options by purchasing New York-based NYSE Euronext (NYX), which in November handled 25.6 percent of American trading volume, according to data compiled by OCC. CME isn’t in that business, nor is it involved with equity trading, an industry where the New York Stock Exchange is among the biggest venues.
IntercontinentalExchange has a better growth outlook than CME, with a projected 31 percent revenue increase from 2011 to 2015 versus 12 percent at the Chicago-based exchange operator, analysts’ estimates compiled by Bloomberg show. IntercontinentalExchange offers futures based on energy commodities such as Brent crude, natural gas and heating oil, and agricultural products such as coffee, cocoa and sugar. The company also owns the world’s largest clearinghouse for credit- default swaps, ICE Clear Credit LLC.
CME tried to purchase the London Metal Exchange earlier this year, and so did IntercontinentalExchange and NYSE Euronext. The contest was ultimately won by Hong Kong Exchanges & Clearing Ltd., which closed the 1.4 billion pound ($2.2 billion) transaction this month. CME never publicly entered the bidding war for NYSE Euronext last year, when Deutsche Boerse AG’s agreement to purchase the company prompted a joint counteroffer from Nasdaq OMX and IntercontinentalExchange. Both proposals were rejected by regulators.
The NYSE Euronext takeover agreement may have sparked speculation yesterday of more deals in the industry, said Thomas Caldwell, who oversees about $1 billion as chairman and chief executive officer of Toronto-based Caldwell Securities.
While shares of CBOE and Nasdaq OMX rose after the transaction was made public, CME’s stock retreated 2.3 percent yesterday, a possible sign some investors anticipate CME also doing a deal, he said. CBOE climbed 4 percent to $30.68, and Nasdaq OMX advanced 3.5 percent to $26.11. Today, CBOE lost 1.2 percent at 9:37 a.m. New York time, while Nasdaq OMX declined 2.6 percent.
“It could spook somebody to do something,” he said in a phone interview. The surge in CBOE’s stock “would be for no reason other than the possibility that it could be considered in play. Everybody is looking for a dance partner.”
A deal for CBOE, which owns the Chicago Board Options Exchange, or Nasdaq OMX would put CME on even footing with IntercontinentalExchange in U.S. equity derivatives. CBOE handled 26.4 percent of American trading last month, while Nasdaq OMX controlled 25.6 percent, OCC data show.
CME and CBOE already have a common bond: exclusive rights to futures and options, respectively, linked to the Standard & Poor’s 500 Index. That shared connection would probably make it easier for CME to buy CBOE, Richard Repetto, an analyst at Sandler O’Neil & Partners LP in New York, said in July.
Deals in the exchange industry are being driven by the desire to diversify, said Howard Tai, a Kansas City, Missouri- based analyst with Aite Group.
“It makes total sense for me that CME will now try to find an acquisition target, preferably with a stock-listing business,” he said in a phone interview.
While U.S. stock trading is spread across dozens of venues, including exchanges run by Bats Global Markets Inc. and Direct Edge Holdings LLC, NYSE Euronext and Nasdaq OMX have a duopoly for stock listings in the nation. Even though American equity trading has slowed, it’s not inconceivable that IntercontinentalExchange and CME would position themselves for a recovery, Tai said.
“When commodities are no longer en vogue, maybe stocks make a comeback,” he said. “The point is, you want to be diverse. You don’t want to have all your eggs in one basket.”
Still, given that CME is the leader in the futures industry, it doesn’t necessarily have to make a purchase in response to IntercontinentalExchange’s transaction, said Matt McCormick, who helps oversee $7.5 billion as a money manager at Cincinnati-based Bahl & Gaynor Inc.
“I don’t see a major concern for CME right now,” he said in a phone interview. “Just because one does a deal doesn’t mean the other is forced to, but they do have to be more nimble. They’re obviously sharpening their pencils and looking at what they can and can’t do going forward.”
Caldwell says CME may feel compelled to strike a deal.
“I’d stay tuned,” he said. “These tend to happen in bunches. I wouldn’t be surprised if CME said, ‘Why don’t we make a bid?’”
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