CME and Chicago Board Agree to Merge

The deal will create a giant derivatives marketplace.
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Updated from 8:29 a.m. (EDT)

The consolidation of the world's exchanges took a big step forward Tuesday with the news that the

Chicago Mercantile Exchange

(CME) - Get Report

is merging with the parent of the Chicago Board of Trade, creating a giant trading marketplace for derivatives and futures contracts.

The deal between the two Windy City exchanges values the new commodities marketplace at $25 billion and may turn Chicago into the global leader for derivatives trading. The CME and CBOT anticipate the new exchange's average daily trading volume of about 9 million contracts a day.

The new exchange, which will be headquartered in Chicago, will be called CME Group. The CME is paying about $8 billion for the

CBOT

(BOT)

, the parent of the Chicago Board of Trade, in a deal that involves a combination of stock and cash.

""This transaction unifies each company's worldwide efforts into a cohesive strategy allowing us to be even more nimble and competitive in meeting the needs of our global customers," says Terry Duffy, the chairman of the CME on a conference call. Duffy will remain chairman of the new company. "Combined, the new organization would be ideally positioned to serve its global customer base anytime and anyplace."

In 2003, the CME and CBOT formed a partnership where the CME exchange began clearing trades for the CBOT.

"A full merger is a natural extension of that strong partnership, allowing us to enhance the efficiencies and opportunities available to derivatives industry participants worldwide," Duffy says.

CBOT stockholders will have the right to receive 0.3006 shares of CME stock, or an equivalent amount in cash. But the cash component of the deal will be capped at $3 billion.

The deal values CBOT, which went public just a year ago, at about $151 a share, or 16% premium to its Monday closing price of $134.51.

Shares of several U.S. exchanges rose on news of the deal. Shares of CBOT were up $16.75, or 12.5%, to $151.26. Shares of the CME were up $8.30, or 8%, to $511.55. The

New York Stock Exchange

(NYX)

rose 30 cents, or 0.41%, to $74.20, while the

Intercontinental Exchange

(ICE) - Get Report

rose $3.23, or $4.2%, to $80.53. However, shares of the

Nasdaq Stock Market

I:IXIC

stock fell 0.1%, to $34.46.

Ever since it went public nearly four years ago, shares of the CME have been a hot commodity and one the top performing exchange stocks.

If shareholders of the CBOT reject cash for their shares, shareholders of the CME will own about 69% of the merged company.

CBOT stockholders, according to a press release, will have the right to receive 0.3006 shares of CME stock, or an equivalent amount in cash.

The combination is expected to add to earnings in 12 to 18 months after the deal closes. The companies have identified up to $125 million in pre-tax cost savings starting in the second full year after the deal is completed, which is expected in mid-2007. The CME expects to take up to $75 million in one-time cash and non-cash expenses in the first year, it says.

The deal comes at a time that consolidation is sweeping the exchange sector. The NYSE Group, the parent of the New York Stock Exchange, is trying to complete a deal with Euronext, an European exchange. The ICE is buying the New York Board of Trade. The Nasdaq, meanwhile, is continuing to make overtures for the London Stock Exchange.

Earlier this year, the Nasdaq acquired a 25.1% equity stake in the LSE after the London market rebuffed an unsolicited takeover offer by the Nasdaq. Many on Wall Street are expecting the Nasdaq to resume its efforts to acquire the rest of the LSE. Today's deal between the CME and Chicago Board could put more pressure on the Nasdaq to pull off its own big merger.