Removing a major hurdle for the Chicago Mercantile Exchange Holdings Inc.'s (CME) bid for CBOT Holdings Inc., parent company of the Chicago Board of Trade, the Department of Justice's (DOJ) Antitrust Division in closing its investigation Monday found that the deal would likely not reduce competition.
With both the CME and CBOT boards backing the merger and a members vote of both companies looming, the question remains whether a competing CBOT acquisition offer from Atlanta-based IntercontinentalExchange (ICE), which is valued higher than CME's bid, can sway CBOT members to vote "no" on a CME combination on July 9.
While the Antitrust Division move takes away a significant roadblock to the two Chicago entities merging, CBOT still has the option of continuing on its own or siding with the offer from ICE, which has vigorously been courting CBOT members in person and through the press (see Daily GPI, June 4). ICE values its offer at $11.2 billion, while the CME offer, which was revised last month, comes in around $10.3 billion.
"Today's DOJ announcement does not change the fact that ICE's proposal remains superior to a CBOT/CME combination," ICE said in a statement. "We have proposed a combination that offers more opportunities to leverage the complementary strengths of both companies, gives CBOT shareholders a greater ownership position in the combined entity, and offers a resolution to the CBOE [Chicago Board Options Exchange] member rights issue" (see Daily GPI, May 31). "We remain committed to an ICE/CBOT combination, which is reinforced by our discussions with the Chicago trading community, investors in ICE and CBOT, our customers and other constituencies, who support our approach. We urge CBOT stockholders and members to carefully evaluate the ICE proposal on its strategic and economic merits, and are confident that on each count, the ICE proposal remains superior."
The DOJ said it reviewed the CME-CBOT case closely. "After an extensive investigation of both the CME's proposed acquisition of CBOT and the 2003 agreement under which CME provides clearing services to CBOT, the Antitrust Division determined that the evidence does not indicate that either the transaction or the clearing agreement is likely to reduce competition substantially," the DOJ said. "More specifically, the division determined that although the two exchanges account for most financial futures (and in particular, interest rate futures) traded on exchanges in the United States:
Commenting on the DOJ clearance to complete their proposed merger without conditions, CME and CBOT jointly announced that they look forward to consummating their merger. Both companies will hold shareholder meetings on July 9 to seek approval for the proposed merger and other merger-related issues. CME's board of directors and CBOT Holdings' board of directors have unanimously recommended that their respective shareholders vote "for" the adoption of the merger agreement originally entered into on Oct. 17, 2006 and amended on Dec. 20, 2006 and May 11, 2007.
"Throughout the review process we have remained confident of receiving approval from the Department of Justice, and today's announcement allows for the marketplace to have a clear view of our merger prospects," said Terry Duffy, CME's executive chairman. "Only our merger allows shareholders and customers to benefit from the greater ability of a combined CME and CBOT to generate growth and achieve synergies with significantly lower integration risk."
CBOT CEO Bernard Dan added, "As we speak with our members, shareholders and customers, we are ever more convinced that the strategic fit of the CME/CBOT combination is truly in the best interest of all our stakeholders, providing low integration risk and long-term value. The new entity will be poised to compete on a global basis in an environment that is changing almost daily, allowing our customers access to new markets and new products."
The DOJ Antitrust Division said it also looked carefully at whether the combination would lead to less innovation and fewer new products. While the evidence suggested that competition between CME and CBOT has, at times, provided some incentive for them to develop and offer new products, it does not indicate that continued innovation depends on competition between the parties, the DOJ found. Rather, the evidence indicated that the two principal impetuses for innovation have been, and will continue to be, the prospect of winning business from the over-the-counter (OTC) market and the potential to offer products that the OTC community can use to hedge the risk associated with its activities.
"Finally, the division investigated whether the combination might foreclose entry by other exchanges into financial futures as a result of the integration of virtually all financial future contracts into a single clearinghouse. The evidence indicates that neither the clearing agreement nor the transaction will foreclose entry by other exchanges. Indeed, the New York Stock Exchange, in connection with its acquisition of Euronext.liffe, recently announced its intention to offer futures products, and the IntercontinentalExchange (ICE), in connection with its bid to purchase control of CBOT, has publicly stated its intent to offer interest rate futures regardless of whether its bid succeeds," the DOJ said.
The division said it relied on the Commodities Futures Trading Commission (CFTC) as a resource concerning the nature and regulation of futures markets. The information the CFTC provided was "invaluable" in helping the division understand current regulatory policy, the division said.
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