Photographer: Jasper Juinen/Bloomberg

Two Market Giants Tried to Create a $75 Billion Mega-Exchange

  • CME, ICE discussed a merger after Deutsche Boerse-LSE’s deal
  • They’re no longer negotiating, unclear why talks broke down

The world’s biggest exchanges are still looking for deals even though the merger of Deutsche Boerse AG and London Stock Exchange Group Plc was scuttled by European regulators.

Singapore Exchange Ltd. has talked with potential partners including Nasdaq Inc. and CME Group Inc. about collaborations, minority stake sales or even a full merger. Deutsche Boerse is looking for acquisitions in data, analytics and indexes. Even the two biggest exchange companies in the world, CME and Intercontinental Exchange Inc., could be on the prowl.

A year ago, CME and ICE talked about merging, discussions not previously disclosed, according to people familiar with the matter. The discussions in April and May 2016 were serious enough to involve bankers and antitrust lawyers, according to the people, who asked not to be named because the discussions were private. The negotiations were spurred by Deutsche Boerse’s deal to purchase LSE, the people said.

Laurie Bischel, a CME spokeswoman, and ICE Chief Executive Officer Jeff Sprecher, speaking on a conference call with analysts Wednesday, declined to comment on the 2016 merger talks. The companies are no longer engaged in negotiations, according to the people familiar with the matter. It’s unclear why the talks fell apart.

Read More: For CME, This Market Megamerger May Just Be on ICE

Together, Chicago-based CME and Atlanta-based ICE would be in a completely different orbit than their biggest rivals. Today, the companies are worth about $75 billion combined. Hong Kong Exchanges & Clearing Ltd. is valued at $30 billion, while Deutsche Boerse and LSE fetch $19 billion and $15 billion, respectively.

CME’s chief executive officer is thinking big. “I’m not a big fan of one-off, smaller-type acquisitions,” Terry Duffy told analysts during a conference call in February. Duffy, who in December added the CEO title to his role as chairman, helped lead CME when it spent about $17 billion buying the Chicago Board of Trade and New York Mercantile Exchange in 2007 and 2008, forming a futures-and-options exchange now worth $40 billion. Those transactions “were a cornerstone of our growth strategy,” he said during the call three months ago.

Still Possible

Industry takeovers, even big ones, are still possible despite Deutsche Boerse and London Stock Exchange Group’s failure, Credit Suisse Group AG analysts wrote a month ago. “We think the global exchange landscape will continue to consolidate,” Christian Bolu and Martin Price said in the report.

Singapore Exchange CEO Loh Boon Chye said last month he’s open to deals that fit the exchange’s strategy. Deutsche Boerse is looking for acquisitions in data, analytics and indexes though it’s wary of the difficulty of mergers in its core exchange business, Chief Financial Officer Gregor Pottmeyer said last week.

A hostile environment for cross-border exchange deals -- particularly following the U.K.’s decision to leave the European Union -- helped doom the Deutsche Boerse-LSE transaction, which was blocked in March by the EU.

From their base in America, CME and ICE are hugely influential in global markets. CME’s exchanges offer futures contracts on oil, stocks, interest rates, gold and agricultural products, to name just a few. ICE is a dominant presence in European derivatives -- with oil, gas and rates products -- and also owns the New York Stock Exchange. It recently expanded in fixed income and data services. The two companies’ energy contracts are especially important benchmarks, something competition regulators would probably examine, possibly leading to divestments.

Merger of Equals

During the negotiations, CME and ICE’s market values were closer so the talks centered on a merger-of-equals deal, the people familiar with the matter said. Now, CME is $4 billion more valuable. Under the preliminary deal terms discussed last year, the combined company would’ve been called CME Group and been based in CME’s hometown of Chicago, said the people, who added that talks ended before due diligence was performed.

Duffy, executive chairman at the time, held discussions with ICE CEO Sprecher, the people said. Duffy would’ve been executive chairman of the new company, and Sprecher CEO, according to the people.

The failed deal also had repercussions at the executive level at CME. The company’s CEO at the time, Phupinder Gill, urged a cautious approach as the talks with ICE progressed to ensure CME employees and shareholders received a good deal, several of the people said. Gill had often been at odds with Duffy in terms of CME’s international strategy, with Gill in favor of expanding the company’s reach with deals in Asia, Brazil, Mexico and Europe, while Duffy was more cautious and preferred to stick close to CME’s dominance in U.S. futures trading, the people said.

‘Surprising’ Departure

The difference in strategic vision with Duffy and the failed ICE talks were a big part of why it was suddenly announced in November that Gill, a 28-year veteran of CME who rose through the corporate ranks, would be leaving the company, according to two people familiar with the matter. Duffy took the CEO role when Gill left.

Gill’s departure was “surprising,” Sandler O’Neill & Partners LP analyst Rich Repetto said at the time. “CME did not give a specific reason why Mr. Gill has chosen now to announce his retirement,” Repetto wrote in a November note to clients.

In a March interview with Crain’s Chicago Business, Duffy outlined his strategic differences with Gill. Duffy said he was focused on expansion efforts in both the U.S. and abroad that showed quick results, adding that projects that may only turn profitable in 10 or 20 years aren’t a good way to run a business. He told Crain’s he doesn’t have a “spaghetti-against-the-wall syndrome” when it comes to acquisitions. “My patience level for that is probably different than my predecessor’s,” he said.

Last month, CME said it would close its London-based derivatives exchange and clearinghouse by the end of the year, ending its campaign to create a futures-clearing hub in Europe. The firm opened the CME Europe derivatives market in 2014 and the clearinghouse in 2011. Neither were ever profitable, losing a total of $110 million by the end of last year, according to CME spokesman Donal McCarthy.

Uniting CME and ICE would put an amiable ending on a history that has sometimes been contentious. They’re fierce competitors in global energy markets, while CME has been largely idle on the acquisition front since 2008 as ICE has expanded its footprint in Asia and Europe. Their corporate cultures are also quite different, with CME’s dating back to the 19th century while ICE was founded less than two decades ago.

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