Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Chicago Merc: What Took You So Long?

It's not every day that a deal decades in the making comes to fruition. However, yesterday, it finally happened: Chicago Mercantile Exchange Holdings (NYSE: CME  ) announced that it will merge with the Chicago Board of Trade (NYSE: BOT  ) to form the CME Group, with a combined value of $25 billion.

Taking a page from NYSE's (NYSE: NYX  ) book, the two companies are looking to further consolidate the exchange industry by taking nearly complete control of trading derivatives. Combined trading in this sector approaches 9 million contracts a day.

CBOT's earnings, reported the same day as the merger, show the obvious attractiveness of the market space. Revenue increased 45% to $163 million, and net income more than doubled to $48.8 million year over year. Higher trading volume, combined with higher rates per contract, dovetailed nicely into expanding operating margins, which increased by 2,030 basis points year over year.

It is a pretty picture for investors, and with the combined exchanges being able to push profitable electronic trading even more and continue to drive down costs, shareholders look to benefit for the foreseeable future. The combined company expects to save $125 million in costs by 2008 -- which, coincidentally, is also when the Merc will close its trading floor for good.

Neither exchange seriously started discussing a merger until after the CBOT went public in 2005, despite having had informal discussions for decades prior. (The Merc had even made a $60-per-share offer for the CBOT before its IPO, according to The Wall Street Journal.) Evidently, the change from a member-owned institution to a shareholder-owned one has placed an entirely different perspective on the deal -- even though, strategically and financially, the deal made sense nearly the whole time. One would think that in a rational marketplace, it would make no difference whether shareholders or members owned the company, but in this case it did.

Still, a few antitrust concerns linger over the deal. Some customers worry that the combined entity may be able to exert almost monopolistic control of the marketplace. The truth is that the new company will still face strong global competition, with international exchanges -- especially in Asia -- relatively unconsolidated in comparison with their U.S. brethren. And there are still a few wallflowers left at the U.S. party -- International Securities Exchange Holdings (NYSE: ISE  ) and the member-owned Chicago Board of Options, whose seat prices, The Wall Street Journal reports, have risen by more than 70% over the past year.

Given the obvious synergies and cost savings from acquiring more exchanges, perhaps the combined CME/CBOT will look for another feather to add to its cap in the near future.

More Foolish exchange coverage:

NYSE is aMotley Fool Rule Breakersrecommendation. To see why, start up afree30-day trial of the newsletter service. You'll gain access to all past issues, as well as valuable insight through our discussion boards.

Fool contributorStephen Ellis does not own shares of any companies mentioned. You can see his holdings foryourself. The Motley Fool has a futuristicdisclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 534620, ~/Articles/ArticleHandler.aspx, 10/23/2016 8:18:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
NYX.DL $0.00 Down +0.00 +0.00%
NYSE Euronext CAPS Rating: *****