With the news that R.J. O’Brien & Associates, Inc. (RJO), one of the oldest private futures brokers, took on partners in an attempt to capture more market share as futures continue to display dynamic growth, the street was abuzz. The two private equity firms, Spectrum Equity Investors and Technology Crossover Ventures (TCV), together will hold a combined majority stake in the company, while the O’Brien family will retain a substantial minority ownership.

The restructured board will consist of current R.J. O’Brien Chairman John O’Brien, RJO CEO Gerald Corcoran, RJO President Colleen Mitchell, three representatives from Spectrum and three representatives from TCV, once the transaction is complete. Corcoran will take on the chairmanship upon close of the transaction.

Despite predictions that the private equity boom is near a bust, RJO CEO Gerald Corcoran and RJO President Colleen Mitchell, in an interview shortly after the announcement, said the move was positive and stressed that RJO will continue as they have but with more resources to execute their growth strategy.

Mitchell said, “It is an opportunity for us to continue the RJO legacy. We have been doing things well for 93 years and we anticipate taking our reputation and high level of client services and continuing to grow it in the U.S. and also internationally.”

That strategy will include possible acquisitions and a greater international presence.

Corcoran added: “We really want to expand our reach globally. Both in attracting new customers overseas as well as expanding our market share in the foreign futures market space.”

Corcoran points out that their new partners have a history of investing in successful tech companies.Some of the firms Spectrum and TCV are invested in include, RiskMetrics Group, Expedia, e-harmony and netfllix. Both have more than $4 billion in investments. “They really know how to invest in companies were technology is important to the success of the firm,” Corcoran adds.

The deal also raises the specter of an initial publics offering, though Corcoran says, there are no plans for one as yet. “An IPO has always been an opportunity for the O’Briens and it will remain an opportunity under the new structure but there are no immediate plans for an IPO. We could have done an IPO but we rather stay private and have the flexibility to run the business with a lot of oversight from the public markets.”

Corcoran told us he wants to see RJO move to the top 10 in Futures’ annual listing of Top Brokers, measured by customer segregated funds. “We want to be in the top 10 soon…We are totally psyched about this.”

Some interesting rumors out of London this week focus on speculation of an impending 'closer cooperation' between Scandinavian exchange operator OMX and the London Stock Exchange (LSE). The two already cooperate in managing the EDX derivatives platform, and both have been linked to takeover bids from NASDAQ -- one real, one fictional. Specifically, NASDAQ owns a stake in the LSE and has made no secret of its desire for the operation, while last month both OMX and NASDAQ denied reports in a Swedish newspaper that NASDAQ had made an offer for the Scandinavian exchange operator.

The most recent speculation began Thursday, when Clara Furse reportedly made an unscheduled meeting with top OMX management. Details are sketchy -- and unconfirmed -- but developments bear watching...
(by Steve Zwick in Germany)

Rumors of an imminent announcement by OMX and LSE were followed instead by an announcement from OMX and Nasdaq – specifically, that OMX had agreed to be taken over by Nasdaq for nearly $4 billion. The deal makes sense on two fronts – first, OMX has a network of exchanges across Northern Europe and the Baltic region that have done exceptionally well in light of the small numbers of listings generated in those countries. Second – and perhaps more importantly – because both OMX and Nasdaq have had designs on the London Stock Exchange. Nasdaq has a 30% stake in the LSE, while OMX is majority shareholder in EDX, the joint derivatives venture that OMX and LSE run in London.
But now new reports are surfacing of a counter-offer from Dubai International Financial Center (DIFC), a state-run business park in the United Arab Emirates that owns the Dubai International Financial Exchange (DIFE). The man in charge of DIFE: former OM boss Per Larsson, who had been laying low since being squeezed out of OM after it merged with the Helsinki Exchange to form OMX. He took the Dubai job last year.
Larsson had taken over from OM founder Olof Stenhammar in the 1990s, and was an early mover on scores of innovations that have since become mainstream – among them the clearing of OTC products, which is EDX’s core business…

The latest twist in the battle for the Chicago Board of Trade occurred Wednesday morning as the Intercontinental Exchange (ICE) and Chicago Board Options Exchange (CBOE) announced that the two have entered an exclusive agreement regarding CBOE Exercise Rights as part of ICE's proposed merger with the CBOT.

As part of the agreement, full CBOT members holding CBOE exercise rights would receive $500,000 in value for each right. The $500,000 payout will be split between the ICE and CBOE. Each exchange will offer $250,000 in cash to CBOT members holding rights or debt securities convertible into stock. On the ICE side that would be stock in the newly combined CBOT/ICE and on the CBOE side, common shares of CBOE after a demutualization. The agreement is contingent on the completion of a merger between the CBOT and ICE.

The package is worth up to $665.5 million, which is equal to the outstanding 1,331 exercise rights times $500,000. Only those CBOT full members eligible to use their exercise right qualify for the consideration. That means they must hold their Class B-1 membership, the exercise right privilege (ERP) and 27,338 Class A common shares. Those that hold the first two and have sold off stock can qualify if they purchase enough stock to bring them back up to the 27,338 threshold by a certain date.

After the most recent compromise between the CBOT and CBOE preceding the CBOT IPO, the ERPs were allowed to trade separately. The CBOE bought back 68 in a Dutch auction and retired those ERPs. Prior to yesterday’s announcement the most recent ERP sale was for $175,000, yesterday an ERP sold for $230,000 and the bid ask was $250,000 at $290,000.

As part of the agreement, ICE and CBOE also have agreed in principal to a broad commercial partnership where they will work jointly on technology, product development, and access to each exchange’s distribution.

The agreement puts pressure on the Chicago Mercantile Exchange, whose enhanced offer to the CBOT, which was unanimously approved by the CBOT board of directors, was still lower than ICE’s offer as well as the market price of the CBOT.

Why take less?

With the CBOT board of directors deciding to endorse the revised CME offer despite it not only being below the ICE offer but also the market price of CBOT stock, perhaps it was only a matter of time before a lawsuit was filed over the whole process. The CBOT has often been bogged down by time consuming expensive lawsuits as it has attempted to transition it business over the last several years.

“Yesterday, if the Merc matches the [ICE] bid it is a no brainer, now the Merc has to pay a premium—this is a guy with vision.”

That is how one Chicago Board of Trade full member, who stuck around for four hours at the meeting between the InterContinental Exchange Chairman and CEO Jeff Sprecher and CBOT members to discuss the ICE offer for the CBOT, reacted to the meeting. That same member was upset with the Chicago Mercantile Exchange's justification for its lower bid, noting that the synergies that make the deal more valuable to the CBOT also make it more valuable to the CME. “Why does the Board of Trade have to pay the discount? The entire burden is put on Board of Trade members.”

The 300 plus CBOT members who attended the meeting had varying opinions regarding the ICE offer and CBOT/CME agreement but all seemed to have gained a large measure of respect for Sprecher, a man many of them knew little about.

Friday morning, June 1, Chicago Mercantile Exchange (CME) Chief Executive Officer Craig Donohue spoke on a Deutsche Bank CEO conference call. He answered questions from reporters about the CME/Chicago Board of Trade (CBOT) proposed merger, and it got interesting.

One reporter who called in told Donahue that while he kept saying the CME’s deal was superior to the InterContinental Exchange’s (ICE) deal and that the CME was a superior company to the ICE, that didn’t answer the question on most CBOT members’ minds, “Are you going to offer more money?” Because, the reporter continued, “many members think you’re low-balling them.”

Donahue responded, “These people are traders, and they are playing the game, but I’m confident there is tremendous support for the deal.”

The reporter also told Donohue that if the CBOT were to vote tomorrow, the votes would not go in favor of the CME deal.

“I don’t agree with that assessment,” Donohue replied.

It’s clear that nothing is clear. Will the CME up the offer? If they don’t, are there not enough of what Donohue calls a “vocal minority,” who oppose the deal to vote against it? As the voting day draws closer, Futures wants to know what you think, especially if you’re a CBOT member!
(by Yesenia Salcedo)

One financial investor in the Chicago Board of Trade (CBOT) is saying publicly in a letter to CBOT Chairman Charlie Carey and president and CEO Bernie Dan that the terms of the Chicago Mercantile Exchange’s (CME) offer to merge with the CBOT are not good enough.

“The CBOT is only merging with the CME because everyone else is merging and it does not want to get left out, and that in of itself, is not a good reason,” says Chris Doll, managing partner at The Vernalis Group LLC, the managing partner of Amphora Fund LLP, which has invested more than 18% of its portfolio in the CBOT.

“As a long-term oriented shareholder, we are very interested in the unlocked value that still exists at the [CBOT],” Doll says in his letter dated June 11. “If there is still potential for value creation as an independent entity, and if the financial markets have yet to fully value this potential, then why should shareholders vote ‘YES’ to merge with any partner at this time,” he asks?

Doll sees possibilities for the CBOT to increase their value at the bargaining table if only they wait a bit longer. It had been less than a year from when the CBOT went public to when it considered the merger with the CME and it did not allow itself enough time to grow. For example, the agricultural contracts just went electronic last August and while it has been a success it can become even more successful. Also the pricing increases stemming from the CBOT fighting off competition from Eurex US have not been allowed to take full effect.

He adds that he does want to see the CBOT merge with the CME, but only if the CME offers a deal that better reflects the future potential value of the CBOT.

View the letter

Back in December I wrote a story about the four grain exchanges and the liquidity that was pouring into them as they went electronic on the Chicago Board of Trade’s e-CBOT trading platform and began offering side by side trading (see “Trade locally, think globally,” December 2006, page 52). The idea behind that story was that with exchange consolidation fever in the air, the regional grain exchanges just might be tasty targets for acquisition.

Since then, the CBOT merged with the Chicago Mercantile Exchange, and the Intercontinental Exchange (ICE) made an offer for the Winnipeg Commodity Exchange (WCE); the latest news is that a competitive unsolicited bid of CAN $50 million, or $77.59 per share, has been made for the WCE by an unnamed third party. That exceeds the CAN $40 million, or $62.08 per share that ICE bid.

Two down and two to go. But what about the Minneapolis Grain Exchange (MGEX) and the Kansas City Board of Trade?

Since December, the price of a membership at the Minneapolis Grain Exchange has increased to $170,000 from $65,000, and the exchange, which owns its own clearing operation, trades hard red spring wheat and five financially settled index contracts, has logged record trading volumes in three of the last six months, both in pit trading and electronic trading. But the exchange is still a mutual organization, making it an unlikely target for acquisition due to the lack of common currency.

Meanwhile at the Kansas City Board of Trade (KCBT), the home of the hard red winter wheat contract, the last membership traded hands in April for $465,000, up from $300,000 in December. Jeffrey C. Borchardt, president of the KCBT, says that the exchange converted to a Delaware for-profit corporation in 1973, not for the purposes of merger and acquisition, he says, but to unlock the value for members in the form of dividends, which the company has paid for each of the last nine years.

So what’s keeping them from being assimilated?

“There is nothing keeping us from doing that. It’s all a matter of interest and strategy,” Borchardt says. “The trend will continue, and at some point in time we may have to consider whether that is in the best interest of our members and customers to get involved with something like that, either on the buying or the selling end.”

Now don’t get the wrong idea. Borchardt DID NOT cop to anything in the works. In fact he wouldn’t even deny that the KCBT hadn’t made the offer for the WCE, (how’s that for canny?) But with 50% increase in seat prices over the last seven months, wheat prices as high as they are, and the issue of e-CBOT going away in the next 12 to 18 months, nothing would surprise me.