CBOT-Merc merger approved

Tribune staff reporter

July 9, 2007, 3:28 PM CDT

The shareholders of the Chicago Board of Trade appeared to overwhelmingly approve a merger with the Chicago Mercantile Exchange today, creating the largest derivatives market ever.

Final vote totals won’t be available for several days, but CBOT Chairman Charles Carey said Monday afternoon “preliminary indications are this thing is going to pass overwhelmingly.”

“We are now going to be on the world stage,” said Leo Melamed, chairman emeritus of the Merc and the man most responsible for futures trading of financial instruments.

The $11.9 billion deal culminates ends four months of jockeying between Chicago Mercantile Exchange Holdings Inc. and upstart IntercontinentalExchange Inc. to acquire the 159-year-old Chicago Board of Trade.

Intercontinental, an Atlanta-based energy exchange, waged an aggressive proxy fight, urging shareholders of CBOT Holdings Inc., CBOT’s parent company, to vote against the merger, which would have cleared the way for ICE’s competing offer.

ICE offered as much as $11.7 billion, but refused to raise its offer on Friday when the Merc raised its bid a third time to win over CBOT’s largest shareholder, Caledonia Investments, based in Australia.

The Merc’s higher bid, improved from the $8 billion first offered in October, won over Caledonia and sealed the deal.

While the merger ends a sometimes rancorous competition between the two exchanges that dates back decades, it solidifies Chicago’s role as a global center for the trade of derivatives.

Known as “derivatives,” the contracts changing hands at the Merc and Board of Trade are a step removed from investments in tangible goods and are used hedge risks or place bets on market movements, providing leverage that can turn small fortunes into big ones.

The new exchange will have average daily trading volume approaching 9 million contracts per day, easily surpassing all of its direct competitors, with a market capitalization of more than $25 billion.

John Lothian, editor of the John Lothian Newsletter which cover exchange issues, said that after the merger is completed, the combined exchanges won’t be satisfied with being simply the world’s largest.

“We are in an age of consolidation,” Lothian said. “They will be looking at acquiring exchanges.”

The Merc’s proposal for the CBOT in October offered a deal that would eventually come to involve both stock and cash. But a competing offer by ICE appeared to have the edge for months, as it promised shareholder as much as $25 a share more than the Merc, depending on the price of ICE and Merc stock.

Leaders of both exchanges have said the Merc takeover bodes well for the city. Mayor Richard Daley, who once separated a pair of exchange leaders who had a shouting match in his City Hall office, predicted the combination will be “good for the Chicago economy” when the merger was first proposed.

Though the exchanges directly employ fewer than 2,200, a number expected to shrink by several hundred after merger-related layoffs, they generate tens of thousands of local jobs through their trading activity.

The deal approved today is going to go a long way to make sure those jobs stay in Chicago, Merc Chairman Terrence Duffy, who will serve as chairman of the combined CME Group Inc., said earlier.

Both the Merc and Board of Trade got their start in corn, soybeans, butter, eggs and other agricultural commodities, and their rough-and-tumble traders still set benchmark prices for the global farm economy. During the 1970s and ’80s, the exchanges hit it big by applying the same trading formula that worked for pork bellies to bonds, foreign currencies and stock indexes.

Shares in CBOT Holdings Inc. dropped $1.18 cents to close at $222.82 on the New York Stock exchange. Chicago Mercanitle Exchange Holdings Inc. shares closed down $4.22 to $570.58.


Copyright © 2007, Chicago Tribune

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