Why ICE May Win the CBOT


The upstart futures exchange has trumped the Chicago Merc in its bid for the Chicago Board of Trade—and the offer could allay antitrust concerns

Barely two months after shaking up the futures-trading world by paying $1 billion to take over the New York Board of Trade, IntercontinentalExchange (ICE) Chief Executive Officer Jeffrey Sprecher is riling the markets anew with his $9.9 billion stock offer for the Chicago Board of Trade (BOT). The surprise offer, announced Mar. 15, stunned executives at both the Chicago Mercantile Exchange (CME) and the CBOT, who have been laboring to close their $8 billion merger.

Sprecher's offer, which is expected to trigger a higher counterbid from the CME, is still more evidence of fast-moving consolidation in the stock and futures-exchange worlds. Gains in computerized trading are reshaping bourses, from the New York Stock Exchange (NYX) and Nasdaq (NDAQ) to the Chicago markets themselves, and all of them are vying to draw traders to their increasingly speedy marketplaces. Sprecher, a former race-car driver and chemical engineer, built Atlanta-based ICE just seven years ago by giving energy and commodity traders an all-electronic alternative to the floor trading that had long dominated the field. Traders have flocked to ICE for lower costs and split-second executions.

Chicago Merger's Red Flags

The two Chicago exchanges, no slouches to modernization even though they both still provide floor trading as well as electronic trades, announced their merger plans just last October. Their deal, which is slated to go before shareholders in April and would close by mid-year, would create the world's biggest derivatives bourse by joining markets that have operated just a few blocks from one another in Chicago—often battling fiercely—for more than a century. Sprecher would keep the CBOT in Chicago, moving his headquarters there, while making the CBOT an even scrappier rival to the larger CME.

Executives at the CME, caught flat-footed by the all-stock offer, say they're sticking by their plans. "We are confident that the CME-CBOT merger will create a strong combination and provide significant and unique benefits for shareholders and customers of both companies," the CME said in a hurried statement. "We are working toward the successful completion of our transaction." Officials at the CBOT said they would review the offer, but pointedly said their planned shareholder vote remains scheduled for Apr. 4.

Much as his offer is roiling the waters, Sprecher's plan would solve a few big problems that are plaguing the all-Chicago merger plans. For one, it would moot antitrust concerns that have haunted the CME-CBOT plans, since the two Chicago exchanges together would control some 85% of the country's futures trading. An influential customer group, the Futures Industry Assn., last month came out against the CME-CBOT deal, saying it would "substantially lessen competition among U.S. futures exchanges, and raise even higher the barriers to entry for new competitors."

ICE Deal Would Add Diversity

The Justice Dept. is now reviewing the CME-CBOT plans and has been questioning many market players about the antitrust issues, industry sources have told BusinessWeek. Sprecher underscored sensitivity about the issue in his offer letter to the CBOT, predicting that "the futures industry and antitrust regulators will embrace" his deal over the "significant concentration of market power" that the CME-CBOT deal would cause. By contrast, he said, his deal would be "strongly pro-competitive."

The biggest problem for the CBOT-CME combination is that it would concentrate the trading of financial futures in one place, with the CBOT chipping in its huge operation in Treasury securities trading, while the CME contributes its extensive complex in interest-rate products and other financial instruments. But an alliance with ICE would bring together far different products, with the Atlanta-based exchange offering energy trading, in particular, along with contracts in various agricultural commodities. The CBOT still is home to much agricultural trading, too. "They're not nearly as overlapping in terms of the products," says Michael Henry, a senior executive in the capital markets practice at Accenture (ACN).

Sprecher also crafted his offer to be appealing to both the management and traders at the CBOT. Along with offering more than $1 billion more, he proposes that the shareholders of the CBOT would wind up owning 51.5% of the combined company. He would keep the CBOT name, as he would base his operation in the historic Art Deco tower where the CBOT now operates. While he would run the combined company as chief executive officer, he offers to find roles in the company for CBOT Chairman Charles Carey and his team.

Possible Bidding War

The deal could also solve another potential regulatory issue. The CBOT and the CME plan to operate out of a single clearinghouse, a subsidiary of the CME that settles and guarantees trades and collects fees for that work. Some critics would like to see the government force the CME to divest itself of the clearinghouse, arguing that the clearing function is too much of a monopoly. But CME executives have said demands for divestiture of the lucrative clearing operation would be a deal-killer for them. The Atlanta exchange would provide a competitive clearinghouse to face off against the CME.

There are weaknesses in the offer, however, that CBOT leaders will have to mull over. For one, it's an all-stock offer, in which ICE would issue new shares that it would swap for the CBOT shares. While the transaction would be worth about $187 in stock per CBOT share by the latest market valuations, that price could fluctuate. By contrast, the CME is offering stock and cash, with the cash portion alone worth about $151 per CBOT share. For another, managers and traders at the CBOT already have a good idea of how the combination with the CME will look, since they've been planning for it for months, but they'd have to start anew with the ICE.

The new offer could wind up opening the door to still more bidders, even some not now in the futures business. The NYSE, busy wrapping up its acquisition of Europe's Euronext exchange, has been keenly interested in expanding its base in futures trading. And Nasdaq, which has backed away from its plans to take over the London Stock Exchange despite owning a big stake, could find the idea enticing, although executives there have so far shunned an expansion into futures. "I'm sure they're all running the numbers," says Brad Bailey, a senior analyst at the Aite Group financial consulting firm.

Investors reacted strongly to the surprise offer. They bid up shares in the CBOT by $29 to about $195, moving it well above the $187 value of the ICE offer. They knocked $31 off the CME's stock price, dropping it to about $533. And they chipped nearly $4 off the ICE price, paring it to about $128. The price moves suggest that investors expect Sprecher's offer to trigger a bidding contest, which is likely to enrich CBOT shareholders even more—no matter who wins.


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