Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) today announced they have signed a definitive agreement to merge. In doing so, the two have created a true, multi-asset trading entity, with a market capitalisation of around $25 billion. This is far in excess of any other regulated exchange, either cash, derivative or a combination of both. Their claim that the combined entity, to be named CME Group, will be the most extensive and diverse global derivatives exchange does not, in this case, seem hyperbole.
In a press release, the exchanges said the new company is expected to transform global derivatives markets, creating operational and cost efficiencies for customers and exchange members, while delivering significant benefits to shareholders. Not surprisingly, the headquarters of the combined organization will remain in Chicago.
“We are very pleased to announce this strategic merger today,” said CME chairman Terry Duffy. “We have enjoyed a strong, productive relationship with CBOT for a number of years, including our historic clearing agreement in 2003 in which CME began clearing all CBOT trades. This merger takes us to the next level in the evolution of our high-growth business. We now will be able to combine the capabilities and best practices of both organizations – establishing an even stronger, more competitive position than either could achieve individually,” he added.
“This is a landmark agreement for our companies, our industry and the city of Chicago,” said Charlie Carey, CBOT chairman. This is certainly no understatement, given the historic antagonism between the two exchanges.
“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. “As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform. We have consistently said that we would focus our merger and acquisition efforts on infrastructure cost savings opportunities in order to create value for our customers and shareholders.”
The combined entity will use the CME Globex electronic trading platform for all of its screen-based products. All open outcry trading will take place on CBOT’s trading floor. How that will affect the CBOT’s existing technological relationship with Euronext.liffe, whom it licenses the Connect trading platform from, remains unclear. CBOT has successfully sold Connect to various North American exchanges.
The CME and CBOT expect the deal to become accretive to earnings within 12- to 18-months after closing, which is expected in mid-2007. It also anticipates pre-tax cost savings of more than $125 million annually, beginning in the second full year following the closing. These savings will be driven primarily by technology, administrative and trading floor-related cost reductions.
From a European perspective, the merger will almost certainly lead to talk of who the combined powerhouse will look to snap up. So far, both have very much focused on derivatives, rather than cash markets, so speculation that the London Stock Exchange, for instance, will be next on the radar, may prove wishful thinking.
