ICE Turns up Heat in CME-CBOT Merger Fight

IntercontinentalExchange Inc. (and no, there is no space between the “l” and the “E”), better known as ICE, is an energy exchange that wants to buy the parent company of the Chicago Board of Trade [CBOT]. ICE has urged CBOT members and shareholders to vote against a CBOT sale to the Chicago Mercantile Exchange Holdings Inc. [CME]. ICE and CME are in a bidding war that got very serious after the Justice Department gave the CBOT and CME regulatory approval to proceed. It will make for an exciting shareholders’ vote on July 9.

According to the Associated Press, “ICE and CME are wrangling for control of CBOT Holdings Inc. ICE's offer values CBOT at $11.9 billion, while CME's offer values the exchange at $10.6 billion. Yet CBOT's board has consistently endorsed the CME offer, saying CME makes a better fit.” The reason the AP suggests is “CBOT and CME are both based in Chicago, use the same clearing service and host trading of similar types of contracts. ICE is an electronic exchange based in Atlanta, specializing in energy contracts. CME claims integrating CBOT with ICE would be more risky and challenging.”

The two suitors have already sweetened their offers to these levels, and early Thursday it seemed that ICE had actually gone above $12 billion. However, the bidding isn’t the only place the two are tangling. The ICE has just won the right to trade futures based on the highly popular Russell indices, which has forced the CME, whose contract with Russell ends later this year, to come up with an alternate product. CME shares actually slipped in trading when the news hit.

All of which is good news for shareholders of the CBOT. Professor Howard Simons, president of Glenview, Illinois-based Rosewood Trading Inc., told Bloomberg, “The Board of Trade shareholders are in a win-win situation. In an auction process, what you keep doing is that you hope your bid scares the other guy out.” It is less appetizing for ICE and CME interests “Whoever winds up buying the Board of Trade is going to have a moment of buyer's remorse because it's almost like they are forcing each other into overpaying,” Professor Simon predicted.

The real question is whether the shareholders will go for the quick extra profit that the ICE offers, or whether the likely lowered costs of the CME/CBOT merger will prove more lucrative in the long-run. Even the insiders don’t know how things are shaping up. “Too close to call” said one analyst. Who said business deals were boring?

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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