Rumors are swirling that the Chicago Mercantile Exchange (NYSE:CME) has approached the Chicago Board of Trade (CBOT) about a potential merger that would create an even more powerful futures and derivatives exchange. Both parties are playing it cool for now, even though CBOT has publicly acknowledged receiving unspecified "expressions of interest." Meanwhile, the Merc has tacked on almost $50 in stock value in the past two days, a 19% rise.
There seems to be a lot of interest in CBOT, which recently began the process of taking itself public. In addition to the Merc, European exchanges like Euronext and Deutsche Boerse are allegedly also casting an eye in CBOT's direction. And why not? Size matters in the exchange business, and CBOT would be a nice fit for many suitors.
For the Merc in particular, this combination would certainly make sense. Not only does the Merc already clear CBOT's products, but also adding CBOT's grain, interest rate, and metals products would make the combined company an even stronger competitor against Eurex AG and the other aforementioned European exchanges.
For now, at least, this is all still a rumor -- albeit a rumor that makes sense. What's more, I haven't heard any credible discussion of what sort of price the Merc is willing to pay, or what CBOT would be willing to accept. Nevertheless, the Merc has more than $700 million in cash on the balance sheet and a red-hot stock to use in a transaction, so I'm sure a deal could get done if both parties wanted to move ahead.
As someone who has taken part in the futures market and will continue to do so, I'm interested in the idea of a combined Merc-CBOT. Given the intense pressure that has been coming into the futures trading market, I'm not really worried that the combined company could really jack up costs for customers. In fact, the leverage of a combined entity may offer a bit more leeway to compete with other exchanges on the base of price, contracts offered, and other services.
The investment community has clearly shown its support for the idea of a Merc acquisition of CBOT. That said, while I like the Merc's business (and doing business with it) with or without CBOT, this stock is just way too hot for me today.
For more on the Merc:
- Chicago Merc: Bet With the House
- Chicago Merc Battles Momentum
- What's Next for This $200 Stock?
- The Allure of Merc's Markets
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.
