The Merc and the CBOT: Together at Last

After several attempts, the two exchanges have finally ironed out a merger agreement. Will shareholders and regulators sign off?

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It has taken 30 years and at least three failed attempts, but the Chicago Mercantile Exchange (CME) has finally brought the Chicago Board of Trade (BOT) to the altar. The Merc, the financially stronger and more fleet-footed of the two old bourses, plans to buy the older CBOT in an $8 billion cash and stock deal, leaders of the two exchanges announced after marathon overnight negotiations on Oct. 17. "It makes good sense," Terrence Duffy, the Merc's plainspoken chairman, said at a press conference.

The deal, expected to close in mid-2007, will bring under one roof trading in futures on U.S. Treasury securities, currencies, Eurodollars, and even the agricultural products that the exchanges were founded on but that now account for only a small and shrinking share of their business. A dizzying 9 million contracts, worth some $4.2 trillion in all, change hands through the computers at the two exchanges every day, and putting them all into one place will bring traders and customers closer together. "It's logical and compelling," says Leo Melamed, chairman emeritus and éminence grise at the Merc.

But the two crosstown exchanges—traditional rivals so feisty that they even pit champions against each other in an annual boxing match for charity—had to swallow a lot of concessions to get what Melamed calls their "Don Quixote" deal together. Hammering out an agreement to meld the boards of directors and managements, along with the financial terms, took marathon bargaining sessions that stretched until 6 a.m. on Oct. 17, just an hour and a half before they made a conference call to tell Wall Street about the deal. At first, the merged firm will be overseen by an unwieldy 29-member board of directors, with just nine hailing from the CBOT, and much of the management will stay on.

BIG PAYOUT

Executives of the two bourses talked about merging first in 1976 and 1977, again in 1982, and yet again in about 1987, one participant in the many talks says. What made the difference this time, says Merc Chairman emeritus Jack Sandner, was the fact that both their stocks were trading publicly. It's clear to all what the two exchanges are worth—with the Merc weighing in at $18 billion and the CBOT trailing behind at about $7 billion (both values before the merger announcement). "We can now value it," Sandner says.

Despite the last-minute horsetrading, the exchange executives expect they'll have no trouble ultimately teaming up. They spelled out rich terms designed to ease a vote by the members of the CBOT. For each of their CBOT shares, worth about $134 before the deal was announced, they'll get either cash worth about $151 or just under 1/3 share in Merc stock.

For members who hold thousands of shares, the lush terms mean a hefty payoff, even though the cash prices will vary, depending on the timing of the merger. Shareholders warmed to the deal: The stocks of both exchanges soared in response, with the CBOT closing up 13%, at a penny under $152 a share, and the Merc closing up 2.36%, at $516.50.

The deal, of course, will be subject to approval by shareholders of both companies, members of the CBOT, and regulators. Executives of the companies expect to handily persuade members, shareholders, and their joint regulator, the Commodity Futures Trading Commission, that the alliance is vital to their global competitiveness. Their argument in Washington will be that consolidation among exchanges around the world makes increased heft crucial.