The Chicago Mercantile Exchange (CME) reported Tuesday that it will acquire cross-town competitor Chicago Board of Trade (CBOT) in an $8 billion transaction that will form a $25 billion global derivatives exchange. The combined company, to be named CME Group Inc., a CME/Chicago Board of Trade company, could transform global derivatives markets and put pressure on competing exchanges. The CME said corporate headquarters of the combined organization will remain in Chicago.

"With leading global derivatives trading in all major asset classes, the combined company will provide one of the world's most liquid marketplaces, with average daily trading volume approaching nine million contracts per day, representing approximately $4.2 trillion in notional value," the CME said Tuesday. "The combined company will provide customers efficient, global access to a wide array of benchmark exchange-traded derivatives based on U.S. interest rate yield curve, equity indexes, foreign exchange, agricultural and industrial commodities, energy and alternative investment products such as weather and real estate."

It is unclear what ramifications the merger would have on the technology services agreement that the CME entered into with the New York Mercantile Exchange (Nymex) earlier this year. In April, the CME expanded its product reach through a technology services agreement with Nymex, under which the CME became the exclusive electronic trading services provider for Nymex's energy futures and options contracts (see Daily GPI, April 7).

Following news of the merger, Nymex issued a prepared statement. "Nymex congratulates CME on its historic agreement with the CBOT, which we believe is further evidence of the consolidation in our industry. Nymex is extremely pleased with our successful technology partnership and wishes them success in their proposed merger."

Under the proposed deal, CBOT stockholders will have the right to receive 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock or to elect an amount in cash per share equal to the value of the exchange ratio based on a ten day average of closing prices of CME common stock at the time of the merger. The cash portion of the consideration is subject to a $3 billion aggregate limit and will be subject to proration if cash otherwise payable would exceed that limitation.

Based on the closing stock prices of CME and CBOT on Oct. 16, the last trading day prior to the announcement of the merger, the combined company is valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion). The exchanges noted that the merger will not impact core trading rights or membership or clearing privileges at either exchange. The cash portion will be financed through cash on hand and debt financing, if necessary.

CME said the combination is expected to be accretive to earnings in 12-18 months post close and it expects pre-tax cost savings of more than $125 million beginning in the second full year following the closing.

"Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets," said CME CEO Craig Donohue. "As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform.

"This merger will allow us to offer our diverse product set on the CME Globex trading platform and to facilitate all open outcry trading on CBOT's trading floor, while clearing all transactions through CME Clearing. As a result, customers will benefit from the broadest range of distinct products, increased efficiencies and unsurpassed liquidity."

Upon completion, Terrence A. Duffy, chairman of CME, will become chairman of the combined organization, while Charles P. Carey, chairman of CBOT, will become vice-chairman of the combined organization. CME's Donohue will become CEO of the combined organization, while CBOT CEO Bernard W. Dan will remain in his current position focusing on overseeing CBOT's activities, products, and customers until the transaction is complete, at which time he will serve as special advisor to the combined company for one year. The board of directors of the combined company initially will be comprised of 20 directors designated by CME and nine directors by CBOT.

"Since CBOT began offering the world's first agricultural futures contracts in 1848, we have been at the forefront of derivatives trading," said CBOT's Carey. "As a single entity, we will be the world's premier financial marketplace in terms of product breadth, global reach and market capitalization and ensure that Chicago remains the center for risk management worldwide."

The exchanges said the transaction is expected to close by mid-year 2007, pending approvals by regulators, shareholders of both companies and CBOT members, as well as completion of customary closing conditions.

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