The US Department of Justice on Monday gave the regulatory approval for the two largest American futures exchanges to merge. The department’s antitrust officials were investigating the proposed merger of Chicago Mercantile Exchange Holdings Inc. acquiring CBOT Holding Inc. and they finally reached conclusion that the proposed merger would not reduce competition substantially. The intended deal next goes to votes by CME shareholders and CBOT members and shareholders on July 9 for final formal conclusion. The proposed merger would create the world’s biggest derivatives exchange and it had been subjected to an extensive examination by the DOJ following anti-trust concerns.
The Department of Justice in its statement, posted on its website said, ‘After an extensive investigation of both the Chicago Mercantile Exchange’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 department further said that that though the CBOT and the CME account for most financial futures traded on US exchanges, ‘their products are not close substitutes and seldom compete head to head, but rather provide market participants with the means to mitigate different risks.’
The complete-Chicago grouping had met fierce condemnation from the futures industry, particularly from intermediaries who fear it would provide an enlarged CME with greater pricing authority, particularly in clearing services for the most commonly traded products. Major investment banks had also disparaged the proposed merger during a seven-month advanced review by the DoJ.
However, investors in CBOT, the second largest US futures exchange, still have to contemplate a higher, unsolicited offer made by IntercontinentalExchange Inc. in March. Therefore, Despite the Department of Justice approval, the deal is far from certain. Atlanta-based IntercontinentalExchange has made a rival offer for CBOT that is worth more than CME’s own offer. Based on current share prices, ICE’s all stock-offer for CBOT was valued at around $11.2 billion or $900 million more than CME’s proposal.
However, the CBOT board rejected the ICE bid in May, citing execution risks. But
CBOT members and shareholders have continued to criticize in recent weeks that CME is not paying enough, if compared with the higher ICE offer.
CME was forced to increase its offer for CBOT on May 11 in the face of disagreement from shareholders. The original offer of 0.3006 Chicago Mercantile shares for each Board of Trade share, made last October, was improved to 0.35 shares. On the other hand, Intercontinental is offering 1.42 of its shares per CBOT share. Both the offers are stock-based and fluctuate with the market. However, according to the revised merger agreement, the Chicago Mercantile agreed to buy back $3.5 billion in shares of the combined company at $560 per share.
