A Chicago-Style Derivatives Giant

The Chicago Mercantile Exchange and CBOT link up in an $8 billion merger, quickening the pace of global financial-market consolidation

The City of Big Shoulders will be the home to one of the world's largest derivatives exchanges. On Oct. 17, Chicago Mercantile Exchange Holdings (CME) said it will buy CBOT Holdings (BOT) for around $8 billion to create a new Chicago-based global derivatives exchange named CME Group Inc.

As the industry consolidates and globalizes, the two exchanges expect their combination to be add to earnings in 12 to 18 months after their deal closes by mid-2007. They expect to generate pre-tax cost savings of more than $125 million beginning in the second full year following the closing, after taking steps such as putting all their trading floor operations into a single facility at CBOT and unifying their information technology operations.

"Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets," said Craig Donohue, CME Chief Executive Officer, in a press release. "As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform."

Under the agreement, 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. CBOT shareholders can also elect for cash instead, but the cash portion of the consideration is subject to a $3 billion aggregate limit. If no stockholders elect to receive cash, stockholders of CME and CBOT would own approximately 69 percent and 31 percent of the combined company, respectively, and CME would issue approximately 15.9 million shares. The combined company is valued at $25 billion, based on the closing stock prices of CME and CBOT on Oct. 16.

After the news, Chicago Mercantile stock price rose 0.5% to $503.25 per share while CBOT shares edged ahead 0.2% to $134.51 per share in early trading on the New York Stock Exchange.

When the merger is completed, Terrence A. Duffy, chairman of CME, will become chairman of the combined organization, while Charles P. Carey, the current chairman of CBOT, will become vice-chairman. Craig S. Donohue, chief executive officer of CME, will become CEO of CME Group. Bernard W. Dan, CEO of CBOT, will remain in his current position until the transaction is complete, and then he'll serve as special advisor to the combined company for one year. The new company's board will initially consist of 29 directors, with 20 directors designated by CME and 9 directors by CBOT.

"As a single entity, we will be the world's premier financial marketplace in terms of product breadth, global reach and market capitalization and ensure that Chicago remains the center for risk management worldwide," Carey said in the press release.

CME and CBOT aren't the only ones with that dream, as other exchanges have also been looking for ways to consolidate in recent months and position themselves for competition in a globalizing industry. The New York Stock Exchange's NYSE Group, for example, is planning a merger with the Paris-based Euronext. The London Stock Exchange has rejected takeover offers in recent months from Macquarie Bank and the Nasdaq.

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