“Chicago used to be known as the hog butcher of the world. The city now will be known as the world’s risk manager,” said John F. Sandner, a Chicago Merc board member.
As we noted on Tuesday, the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (BOT) are combining with the Merc Exchange as acquirer. The deal was in the eyes of many inevitable and an infinitely logical combination. Given that what are the implications of the deal?
A team of writers at the Wall Street Journal (sub. req.) do a nice job tracing the history of the two exchanges and how it is that they finally came together. Given the size and scope of the new combined entity it is only logical that this could re-ignite the consolidation wave for security exchanges.
The Chicago deal illustrates the increasingly rapid pace at which financial exchanges world-wide are consolidating to lift profits by cutting costs. Exchanges have morphed from member-owned clubs into profit-hungry publicly traded companies. This gives them an incentive to make acquisitions and also a currency, their stock, with which to do so.
Alexei Barrionuevo of the New York Times reports that the combined entity will change the competitive landscape. Not only will the new CME move more aggressively overseas to expand their franchise, their added heft will make it all the more difficult for foreign competition and domestic upstarts to encroach on their turf.
DealBook picks up an item on the fate of the London Stock Exchange in light of this deal. The Nasdaq (NDAQ) may feel compelled to re-initiate its bid for the entire exchange. In any event, as noted by Laurie Kulikowski at TheStreet.com, it is unlikely that the security exchange side of the equation will remain quiescent.
Zachery Kouwe of the New York Post notes how this “will likely boost the value of the New York Mercantile Exchange - one of the last independent commodities markets - right before its planned stock offering.” The speculation being that this increased scarcity value could lead to a strong start for the deal.
Joseph Weber at BusinessWeek.com reports on how the deal is yet another nail in the coffin of “open outcry” trading. The two firms are planning to combine their floor trading at a single location. Although open outcry remains roughly 25% of volume at the two entities, it is only a matter of time before the floor is relegated to the dustbin of history.
Antony Currie at breakingviews focuses on the financial aspects of the transactions. While both firms were trading at relatively lofty valuations the deal is based in reality. The focus is on the cost side where the two exchanges are clearly complementary, but for the deal to truly work the combined entity needs to continue its revenue growth.
Both exchanges have had a significant tailwind from increasing volume driven in large part by electronic trading. In addition, they have been able to increase fees recently. With a merger review pending, we are unlikely to see significant fee increases until the deal closes some time in 2007. There is little doubt that the newly combined CME is in a stronger position facing the future. Now all they need is the tailwind of volume to continue to justify the combined firm’s lofty valuation.
CME-BOT 1-yr comparison chart: