Markets & Finance

The Merc Holds Firm on Its CBOT Offer


CME executives refused to sweeten the pot in a bidding war with ICE and downplayed the likelihood of antitrust challenges to the deal

The deal to unite Chicago's futures exchanges and create the world's biggest derivatives market is looking increasingly shaky. Leaders of the Chicago Mercantile Exchange (CME) on Mar. 22 refused to raise their now $8.5 billion offer to buy the rival Chicago Board of Trade (BOT) to match a rival $9.7 billion bid by Atlanta-based IntercontinentalExchange (ICE), even as fresh signs started emerging that the deal could face trouble in an ongoing antitrust review in Washington.

Executives of the CME passionately defended their planned takeover in a meeting with shareholders and traders of the CBOT at a hotel just blocks from the CBOT's trading floor, invoking the century-plus history of the two exchanges. They played to the civic pride of the Chicagoans who trade on the two exchanges and derided the offer by ICE as an "inferior" bid of an "upstart" exchange. But the one thing they refused to do was to raise their price. "No," said CME Chairman Terrence Duffy, at a press conference after the session. He insisted that the CME's bid will prevail when the CBOT's leaders parse out the deal. Argued CME Chief Executive Officer Craig Donohue, "we're competing with an inferior offer."

CBOT Traders Apply Pressure

The pair, appearing before some 200 traders and CBOT shareholders, didn't react to calls for a higher price, except to thank the speakers and insist their deal was better. Their inflexible stance, which one CBOT trader branded an example of the CME's longstanding "arrogance" toward CBOT members, will get them nowhere, traders predicted. "If it came to a vote right now, there would be a landslide in favor of ICE," argued a longtime trader who took to the microphone to urge them to sweeten the terms. Traders applauded.

The traders were troubled by everything from the price to the stake they would have in the CME. On Mar. 15, the Atlanta exchange offered $9.9 billion in stock for the CBOT, an amount that has fluctuated with the ICE's dipping stock price and rise in the CBOT's price (see BusinessWeek.com, 3/15/07, "Why ICE May Win the CBOT"). The offer, as it now stands, trumps by about $1.2 billion the current value of the original $8 billion deal the CME made in October with the leadership of the CBOT to join their exchanges. ICE would also give the CBOT shareholders control of more than half the equity in its deal, while they would get just about a 31% stake if they went with the CME.

The CME's stock closed on Mar. 22 up less than a percentage point, at about $544. The CBOT's stock slipped 2%, to about $193. And the ICE shares dipped just under 2%, to about $127.

Playing the Hometown Card

At the hotel gathering, speakers argued that both price and equity need to be revalued now. "The market has changed," urged one. When the CME's leaders simply thanked several speakers and repeated their claims that their deal is superior, some of the shareholders shrugged that the CME-CBOT deal will die when it comes to a shareholder vote. "That's the end of it," said CBOT trader Ron Grossman.

Still, the CME leaders tried to make an impassioned case, appealing both to local loyalties and dollars and cents to prove that their offer trumps the ICE terms. Pointedly saying they were lifelong Chicagoans who have a deep stake in the city, unlike the Atlantans at ICE, they said ICE is a far smaller exchange that lacks the capacity to handle the huge and growing volumes of business being driven through the CBOT every day. Where the CBOT handles as many as 2 million trades a day, ICE's clearinghouse has handled at most a mere 106,000. And the ICE stock, they insisted, is "a weaker currency" than the CME stock and there are few if any synergies among the products ICE would bring to the deal.

They argued that traders, keen to preserve a future for themselves and their children, should rally to the CME offer. "We can't afford not to seize the moment," urged Jack Sandner, a former CME chairman who had tried several times to join the CBOT and CME. And Leo Melamed, another former CME chairman, emotionally urged the traders to accept the deal, saying a united Chicago market would attract the kind of liquidity that would assure success in the global competition exchanges now wrestle with.

Antitrust Challenges Ahead

Meanwhile, a former Justice Dept. official told Bloomberg News that the deal will likely be shot down or altered by the department. "It's really hard for me to see how that merger could be approved," said Douglas Rosenthal, who was chief of the foreign commerce section of the department's antitrust division from 1977 to 1980. ICE Chief Executive Jeffrey Sprecher has argued that his deal would not be plagued by the antitrust concerns that some critics have raised, since the two Chicago markets would together control some 85% of the futures trading in the U.S.

CME chief Donohue insisted on Mar. 22 that the deal will pass muster with the Justice Dept. He said he wasn't basing his view on any new information from U.S. authorities but on the longstanding views of his advisers. The CME and CBOT officials scoured the deal thoroughly and are confident it will survive any criticism, he suggested (see BusinessWeek.com, 10/17/06, "The Merc and the CBOT: Together at Last").

Now the action in the deal shifts to the board of the CBOT. The directors there delayed a scheduled Apr. 4 shareholder vote so they could review the ICE offer, including talks with the ICE executives. The CME officials are betting they'll stick with the home team. But if traders pressure the CBOT board and there is no move by CME to hike the price, this deal, like several earlier attempts to combine, could crumble.

Weber is BusinessWeek's chief of correspondents.

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