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CME's Acquisition of CBOT Will Affect Big Pool of Investors [Wall Street Journal]

Summary: The biggest deal (yet) in a global consolidation of the financial exchanges is yesterday's blockbuster merger which sees Chicago Mercantile Exchange Holdings buying its smaller rival CBOT Holdings Inc. for about $8B, giving the new conglomerate a book value of $26B. The mergers accelerate the rapid growth of investment's hottest sector, derivatives: contracts whose value is derived from the movements in other financial instruments such as stocks and bonds. Last year almost 10 billion derivatives contracts were bought and sold on worldwide; the business barely existed 20 years ago. Derivative trading grew almost 18%/year between 2002-2005. The CME's most popular contract is its Eurodollars; CBOT, once famous for its grains and meats, is now dominated by its Treasury-bond futures. Both exchanges trade options alongside the outrights. The underlying value of their combined daily volume is a staggering $4.2T. Previous attempts at merging had been stonewalled by floor-traders, who once owned the places (CME went public in 2002, CBOT in 2005). The deal comes on the heels of June's NYSE/Euronext NV merger. By late 2008, the CME plans to close its trading floor and move its remaining pits to the CBOT, meaning only two major U.S. exchange floors remain, it and NYSE. They anticipate initial pretax savings of $125M/year through shutting down one floor and combining electronic platforms; there is hope that savings will be passed-through to customers in lower commissions fees. The deal must undergo regulatory review by the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Justice Department, but analysts say it's unlikely it will be derailed. Repetitive contracts, such as CME interest-rate futures and CBOT bonds, will be combined. Each CBOT Class A share will get 0.3006 share of CME Class A common; CBOT shareholders can elect to receive cash. CME could issue up to 15.9M new shares as part of the deal. Of the up to $3B in cash it could spend, it would raise about $2B in new debt. CME will own from 69%-80% of the combined company ("CME Group Inc."), depending on CBOT shareholders' decision on whether to accept cash or stock.
Related links: In related articles, WSJ diagrams the offerings of each exchange, solicits the feedback of Chicago traders and Wall Street analysts, and weighs whether commission prices will rise or fall, merger conference call transcriptCME /CBOT to Merge Into $25B Derivatives ExchangeMating Season for the Big ExchangesWhy I'm Long-term Bullish on the ExchangesTokyo Stock Exchange Favors Euronext-NYSE DealCombined ICE-NYBOT Looks AttractiveExchanges Rally on CBOT, CME Deal (Reuters)
Potentially impacted stocks and ETFs: Chicago Mercantile Exchange Holdings (CME), CBOT Holdings Inc. (BOT), NYSE Group Inc. (NYX), Nasdaq Stock Market Inc. (NDAQ), International Securities Exchange Inc (ISE) • ETFs: First Trust IPOX-100 Index (FPX), iShares Dow Jones US Broker-Dealers Index Fund ETF (IAI) and streetTRACKS KBW Capital Markets (KCE) each have approx. 5% holdings in CME

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Source: CME/CBOT Merger Creates World's Biggest Derivatives Exchange