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Chicagoist doesn't usually dabble in business news. Normally, we find talk of mergers and acquisitions a suitable substitute for Ambien. But we've found ourselves all wrapped up in the hoopla surrounding the Chicago Mercantile Exchange's buyout of the Chicago Board of Trade. After an October announcement of intent, the directors of the CBOT scheduled an April 4 meeting to vote on CME's $8.6 billion bid. Presuming it was a done deal, the CME was all set to rock back on its collective haunches and merge slow and steady into the CBOT's love nest.
Not so fast, said out-of-towners Intercontinental Exchange Inc. Last week, the Atlanta-based firm (which only dates back to 2000, as opposed to the two century-old Chicago trading firms) made an unsolicited offer that, so far, CBOT hasn't refused: a monetary uppage of CME's bid to the tune of $9.6 billion. Where such a relatively new upstart got the dough to best the Merc by a billion freaking dollars we have no idea. We do know that things just got a whole lot more interesting as a result. Due to the interloper, the CBOT has postponed the crucial April 4 meeting indefinitely while they review ICE's offer.
CME's now on the defensive, trying to punch up the benefits of a CBOT/CME merger without actually raising their bid. We're hometown buddies, the CEOs cajoled on Thursday. Surely the CBOT would rather go with a local sweetheart instead of some cocky greenhorn, they reasoned. Some mud has even been slung between CME and ICE; CME called their rival's offer "inferior" despite the extra moolah, while ICE scoffed that "CME's rhetoric will not fool CBOT shareholders." Below the belt. We like it. To top it all off, the U.S. Futures Exchange started offering a contract based on whoever wins out. Seriously, those guys will bet on anything, even the fate of one of their own partners in crime.
Image coutesy of McBLG97.
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This merger, for those who are interested, really boils down to two things: exercise rights on the CBOE and clearing arrangements.
CBOT traders have historically enjoyed the right to trade on the Chicago Board Options Exchange without paying for a seat on that exchange, because of the CBOT's relationship with the CBOE. Now, the CBOE plans to do away with those rights if the CME buys out the CBOT. It has not decided whether it will do the same if ICE and the CBOT merge, however, ICE is allowing the CBOT to remain the parent company under its proposal, thereby hinding that CBOT members will retain their trading rights on the CBOE.
The second point of contention for these rival bidders is the clearing of trades. CME already clears (financial settlement of trades) all of the CBOT's trades and is in a contractual agreement to do so until 2009. Since have already implemented this clearing arrangement, they argue that it will be easier for the two to merge and go on with business as usual.
On the other hand, ICE does not have the scale of clearing operations that the CME does. In fact, it currently clears less than one-tenth of the trades that are cleared by the Merc. However, ICE's proponents argue that they will have until 2009 to build out a scalable clearing infrastructure to meet the demands of the CBOT.
At this point, I would peg the odds at 70% CME, 30% ICE. The CME may be the CBOT's hometown brethren, but the directors of the CBOT have a fiduciary responsibility to their shareholders to recommend the best possible deal. So, it is a wait and see game. The final result will be very interesting.
thanks for shedding more light on the details. ICE's bid is obviously an improvement on the surface, but i knew there had to be more to the whole relationship. what's funny to me is the Merc is leaning so heavy on Chicago ties and the hometown advantage, when ultimately, money and business don't care a whit about that sentimental fluff.