CBOT hits CME bid

Futures, Aug 2007 by Collins, Daniel P, McMahon, Chris

ICE FROZEN OUT

From the moment the Intercontinental Exchange (ICE) announced its unsolicited bid for the Chicago Board of Trade (CBOT) on March 15, it seemed within the Chicago Mercantile Exchange's (CME) power to end the debate and close the deal by simply matching the dollar value of the ICE offer, but the CME stubbornly insisted its definitive agreement with the CBOT was superior. And despite all of its protestations that its bid(s) remained superior, the CME eventually came through with the knockout punch. On July 6, the Friday before the July 9 vote, the CME increased the stock-swap exchange ratio to .375, from .350, pushing the value of its offer to $11.8 billion, which was just above the ICE bid, and wrapping up the vote unless ICE anted up.

The CME and CBOT announced the day of the vote that preliminary results indicated shareholders from both exchanges approved the merger, though an official vote total had not been completed at press time.

The move was enough to get CBOT's largest shareholder, Caledonia Investment Pty. Ltd. of Australia, to back the deal. Caledonia, which owns approximately 7% of CBOT, had indicated earlier in the week that it would vote 'no' on the merger.

Like many CBOT members, Caledonia saw the CME deal as the better fit but was not prepared to vote for a lower offer. "We have always supported this merger from a strategic rationale and long-term growth perspective," said Caledonia Managing Director Will Vicars, in a CME release. "Now, with the CME's latest enhancement, we fully endorse this merger and will vote in favor of this transaction," he added.

CME Executive Chairman Terry Duffy was up all night July 5 negotiating the enhancement, which the CME described as its "best and final offer." Duffy said that while they were confident previous enhancements had turned the tide, it was important to get the largest shareholder on board. "This vote was trending very highly in our favor and we were confident that we were going to get it, [but] the largest single shareholder of the Board of Trade was on the opposite side of the equation voting 'no.' It is always important to have the largest single shareholder supporting your transaction."

CBOT Chairman Charlie Carey wasn't quite as confident before the final offer, referring to negotiations as a game of Texas hold-em. "I wasn't convinced either way but it was going to be a tough one."

Former CBOT Chairman Nickolas J. Neubauer says the CME played its cards well. "What the [CME] did was something that is a standard of good trading, namely: wait until the point at which you could actually seal the deal to make your final bid. They waited to the moment the deal could be sealed and there would be little or no opportunity for the ICE to increase their offer."

Neubauer says, "[The merger is] something that has been talked about for 30 years or more and almost everybody at both exchanges is happy about it."

ICE was unrelenting in its pursuit of the CBOT, addressing member fee concerns and negotiating a deal with the Chicago Board Options Exchange (CBOE) on exercise rights in the process (see "What about CBOE?" page 15). And ICE share prices climbed steadily as Chairman and CEO Jeffrey C. Sprecher announced deals to acquire the Winnipeg Commodity Exchange and OTC platform ChemConnect Inc., and then ICE signed an exclusive deal with the Russell Investment Group, taking one of the CME's largest equities based contracts.

Carey and the CBOT board steadfastly supported the CME proposals throughout the process mainly because of what it referred to as greater integration risk and ICE's supposedly inferior technology. "Everybody affirmed the board's decision that this was the best merger partner, it was all about getting a price that the shareholders would approve and that is exactly what happened," Carey says, adding, "It was two great sets of traders trading against each other and they split the difference at .375 and now we can move on."

A CBOT shareholder, member and former member of the CBOT governance said at the shareholder vote that the deal is in the best interest of both exchanges. "The CME is like anyone else, they are trying to buy low, and if not for the ICE intervention, it probably would have been for a lower price. We benefited from all that."

This coup de gr�ce followed several previous moves by the CME and CBOT to sweeten the deal, including a one-time $9.14 cash dividend payable to CBOT shareholders, conditioned on approval of the merger; a post-close tender offer of $560 per share for up to $3.5 billion of shares of the combined company, greater board representation; and a revision to clearing member minimum shareholder requirements. Combined, the moves closed the more than $1 billion gap between the ICE unsolicited bid and the CME's first offer.

"The CBOT is worth more - a lot more," says Chris Doll, managing partner at the Vernalis Group LLC, which has invested more than 18% of its portfolio in the CBOT. Although he supports the CME/CBOT merger, he still thinks the price was too low.