Two days after IntercontinentalExchange (ICE) resubmitted an enhanced acquisition bid for the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME) on Thursday added value to its own bid for the 159-year-old global derivative exchange. As a result, CBOT's board of directors announced that ICE's new bid was not superior to the just revised CME offer. The real test will come July 9 when CBOT's members and shareholders will get to vote on the proposed merger with CME.

The cat-and-mouse game for CBOT began in Oct. 2006, when CME first publicly approached CBOT with its $8 billion offer (see Daily GPI, Oct. 18, 2006). In March, ICE proposed a $9.9 billion stock-for-stock transaction for CBOT (see Daily GPI, March 16; March 23). Since that time, both companies have made numerous revisions and enhancements (see Daily GPI, May 14; June 4; June 14).

ICE's fortunes suffered a significant blow Monday when the Department of Justice's Antitrust Division closed its investigation into the proposed CME-CBOT merger of the two Chicago-based firms, with a finding that the deal would likely not reduce competition (see Daily GPI, June 13). The final say will come in a July 9 vote of the rank and file. ICE has been wooing CBOT members to vote against the CME offer.

On Thursday, CBOT Holdings announced that its board and special committees have "carefully reviewed" ICE's revised proposal and concluded that it is not superior to the revised CME merger agreement announced earlier in the day. Its board also unanimously reaffirmed their recommendation that CBOT Holdings shareholders vote in favor of the revised merger agreement with CME on July 9.

"After a review of the new elements of the latest proposal from ICE, the boards of CBOT Holdings and the CBOT concluded that the revised merger agreement with CME continues to offer greater overall benefits for our shareholders and members," said Charlie Carey, CBOT's chairman. "Our boards and advisors reviewed this latest proposal, considering both the short-term and long-term value to the company, and found that it was not superior to the revised CME merger agreement."

"ICE's revised proposal did not adequately address important strategic and operational concerns, such as integration and execution risk," said CBOT CEO Bernard W. Dan. "A combination with the CME will create the most extensive and diverse global derivatives exchange, while delivering significant benefits to shareholders and customers. Today, our common clearing arrangement with CME provides tremendous benefits to our market users. Going forward, this combination will allow us to better compete in a rapidly changing and technology challenging global environment."

The CME said its revised terms of the merger agreement will provide additional value to all CBOT Holdings shareholders and guarantee holders of Chicago Board Options Exchange (CBOE) exercise right privileges (ERP). The revised agreement has been unanimously approved by the boards of directors of both companies. Among the revisions, all CBOT shareholders will receive a one-time cash dividend of $9.14 per CBOT share, or a total of $485 million. The dividend will be declared by CBOT before the close of the merger and paid immediately prior to the merger, after all the conditions to the merger have been satisfied. For a CBOT full member who holds the minimum 27,338 shares of CBOT Class A common stock currently required to exercise the ERP, the $9.14 per share dividend equates to $250,000 of cash value.

The revised CME bid also allows for the right to continue as a class member in the CBOE lawsuit with all of its substantial upside recovery potential and a guarantee, even if the lawsuit is lost or settled, of up to a $250,000 payment; or for members who do not want to pursue the lawsuit, the right to sell their ERP to the corporation for $250,000 payable following the closing of the merger.

The new conditions surrounding the CBOE lawsuit is a counter to an agreement ICE has reached for a settlement of the the lawsuit in the event of its merger with CBOT. Under ICE's agreement CBOT full members holding CBOE exercise rights would receive $500,000 in value for each right, or up to $665.5 million in the aggregate. (see Daily GPI, May 31).

Another change in CME's revised offer is that a five-person committee of the board of CME Group, including three CBOT directors, will have veto authority over rule changes, including member fees, which could materially impair the business opportunities of CBOT members. This veto authority will extend to the 2012 annual meeting of stockholders, an extension of three additional years from the original merger agreement.

"We believe that this one-time dividend to all CBOT shareholders and the unique ERP guarantee and purchase offer further improve the value of a merger with CME over the unsolicited ICE proposal," said Terry Duffy, CME executive chairman. "CME and CBOT are committed to completing our merger and delivering superior value to shareholders of both companies. We recognize that different CBOT members may have different preferences for realizing value for their ERP rights. The combination of the substantial cash dividend for all CBOT shareholders and the more flexible and potentially more valuable ERP guarantee better addresses CBOT shareholders' interests and positions us to successfully complete our shareholder and member votes on July 9."

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