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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, October 17, 2006

CME & CBOT Merger: Great for Exchange Holders, Bad for Everyone Else

This morning we had 'another' monumental merger among the financial exchanges. The Chicago Mercantile Exchange (CME) is acquiring the Chicago Board of Trade (BOT) in an $8 Billion transaction. That translates to a roughly 16% premium to the close for BOT shares, and if the deal closes in all stock the CBOT will own 31% of the combined entity. BOT shares are up 16% at $156.25 and CME shares are trading up 3.9% at $523.00 in pre-market activity.

CBOT stockholders will have the right to receive 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock OR to elect an amount in cash per share equal to the value of the exchange ratio based on a ten day average of closing prices of CME common stock at the time of the merger. The cash portion is subject to a $3 billion aggregate limit and will be subject to proration if cash otherwise payable would exceed that limitation. CME would issue approximately 15.9 million shares if the all stock route is taken. Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day prior to the announcement of the merger, the combined company is valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion). The merger will not impact core trading rights or membership or clearing privileges at either exchange.

"We are very pleased to announce this strategic merger today," said CME Chairman Terry Duffy. "We have enjoyed a strong, productive relationship with CBOT for a number of years, including our historic clearing agreement in 2003 in which CME began clearing all CBOT trades. This merger takes us to the next level in the evolution of our high-growth business. We now will be able to combine the capabilities and best practices of both organizations -- establishing an even stronger, more competitive position than either could achieve individually. I am personally very proud to have this opportunity to work so closely with our counterparts at CBOT to complete this momentous transaction for the benefit of our customers and shareholders."

We have telegraphed and discussed the global consolidation in the financial exchanges, and it isn't just in the US. The one thing that is definitely true in all these is that it is horrible for the consumer (exchange clients and traders) because they get to dictate pricing with essentially no competition and no choices. Both NASDAQ and NYSE have made changes recently to their level 2 feed and equivalent to third parties, and that is not good for consumers. Calling for a blockage of a merger is never a fun situation to be in, but these mega-exchanges are BAD for traders and consumers. Mark my words.

All exchanges stocks are indicated higher on this news today: Intercontinental Exchange (ICE) +4% at $80.75 pre-market; NASDAQ (NDAQ) +2% at $35.30, NYSE (NYX) +2% at $75.50 and International Securities Exchange (ISE) +4.75% at $50.96.

Jon C. Ogg
October 17, 2006
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