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.
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