The combined company will bring together two proven industry-leading innovators to create a single company, strengthening its ability to grow in an increasingly competitive environment. 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 9 million contracts per day, representing approximately $4.2 trillion in notional value. 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.
Transaction Structure
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 (the exchange ratio) 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. If no stockholders elect to receive cash, stockholders of CME and CBOT would own approximately 69 percent and 31 percent of the combined company, respectively, and CME would issue approximately 15.9 million shares. Based on the closing stock prices of CME and CBOT on October 16, 2006, 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 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.
The combination is expected to be accretive to earnings in 12 to 18 months post close. We expect pre-tax cost savings of more than $125 million beginning in the second full year following the closing.
Governance
When the merger is completed, Terrence A. Duffy, Chairman of CME, will become Chairman of the combined organization. Charles P. Carey, Chairman of CBOT, will become Vice-Chairman of the combined organization. Craig S. Donohue, Chief Executive Officer of CME, will become Chief Executive Officer of the combined organization. Bernard W. Dan, Chief Executive Officer of CBOT, 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 29 directors, 20 directors designated by CME and 9 directors by CBOT.
“We are very pleased to announce this strategic merger today,” said CME Chairman Terry Duffy. “We have enjoyed a strong, productive relationship with CBOT for a number of years, including our historic clearing agreement in 2003 in which CME began clearing all CBOT trades. This merger takes us to the next level in the evolution of our high-growth business. We now will be able to combine the capabilities and best practices of both organizations – establishing an even stronger, more competitive position than either could achieve individually. I am personally very proud to have this opportunity to work so closely with our counterparts at CBOT to complete this momentous transaction for the benefit of our customers and shareholders.”
“This is a landmark agreement for our companies, our industry and the city of Chicago,” said Charlie Carey, CBOT Chairman. “Since CBOT began offering the world’s first agricultural futures contracts in 1848, we have been at the forefront of derivatives trading. By combining our leading institutions, we will be better positioned to continue our traditions of innovation and leadership. 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.”
“Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets,” said Craig Donohue, CME Chief Executive Officer. “As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform. We have consistently said that we would focus our merger and acquisition efforts on infrastructure cost savings opportunities in order to create value for our customers and shareholders. 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.”
“Our merger with CME lays a strong foundation for the continued growth of our combined company,” said Bernie Dan, CBOT Chief Executive Officer. “We are bringing together CBOT’s benchmark products, global distribution and customers with CME’s already diverse product portfolio and developed global relationships to bring added value to our combined customers. We are committed to working with CME’s leadership to close this transaction and unlock the tremendous potential we believe the combined company will deliver to its shareholders.”
Strategic Benefits of the Transaction
-Accretive Transaction: The parties expect the transaction to become accretive to earnings within 12 to 18 months after the closing.
-Synergy Opportunities: Anticipated pre-tax cost savings of more than $125 million annually, beginning in the second full year following the closing, driven primarily by technology, administrative and trading floor-related cost reductions.
-Operational Efficiencies: Expected customer benefits derived from consolidating trading floor operations into a single facility at CBOT, unifying IT operations and eventually moving CBOT products onto CME Globex®.
-Strategic Position: Broader platform to grow core business, innovate new products including over-the-counter offerings, and fully develop the pre-existing strategic initiatives and partnerships of both organizations.
The transaction is expected to close by mid-year 2007, pending approvals by regulators, and shareholders of both companies and CBOT members, as well as completion of customary closing conditions.
Lehman Brothers and William Blair are acting as financial advisors to CME and Skadden, Arps, Slate, Meagher & Flom LLP is acting as CME’s legal advisor. JPMorgan is acting as sole financial advisor to CBOT and Mayer, Brown, Rowe & Maw LLP is acting as CBOT’s legal advisor.
Representatives who are serving on the CME transaction committee include: Terry Duffy; Craig Donohue; Phupinder Gill, CME President and Chief Operating officer; and CME Board members Leo Melamed, Chairman Emeritus; and Jack Sandner, retired Chairman. Representatives who are serving on the CBOT transaction committee include: Directors Charlie Carey, Bernard Dan, Joseph Niciforo, Christopher Stewart, and CC Odom II.
“I’m so proud to have been a part of the evolution of this dynamic industry,” said Leo Melamed, CME Chairman Emeritus, “and pleased that today’s announcement further demonstrates the pioneering leadership of our two innovative exchanges.”
“Through this merger, we combine the rich histories and vast experience of two of Chicago’s leading financial institutions,” said Jack Sandner, retired CME Chairman. “Together, we will continue to develop new ways to meet the needs of customers around the world.”
A special transaction committee of the CBOT is being advised by its financial advisor, Lazard Freres & Co., LLC, and is being advised on legal matters by Latham & Watkins LLP.
The Combined Company
The combined company will be the most extensive and diverse derivatives exchange in the world and will offer the:
-Highest derivatives volume, with average daily volume approaching 9 million contracts per day and notional value of approximately $4.2 trillion per day based on recent results
-Leading derivatives clearing facility in the world based on volume
-Premier marketplace for interest rate trading for the U.S. dollar-denominated yield curve, including CME Eurodollar futures, the most actively traded futures contract, and the CBOT 10-year U.S. Treasury Note futures, the third most actively traded futures product
-Leading market for equity index derivatives trading, including futures and options on futures on major U.S. equity indexes
-Leading regulated marketplace for foreign exchange derivatives trading
-Leading agricultural trading complex consisting of grains and livestock futures contracts; the largest electronically traded agricultural futures complex.
-Leading technology providing global access to benchmark products in all major asset classes around the clock, around the world on the CME Globex platform
User Benefits
-Access to distinct products and services as well as innovative new product offerings on an integrated platform
-Pipeline of new and innovative products and functionality
-Increased efficiencies through consolidated systems and combined open-auction trading environments
-Integrated market data services
-Seamless continuation of current clearing arrangement, which secures existing margin benefits for customers
