Streetwise Professor

So exchange speed dating continues apace. The latest, hottest rumored couples? First, a pairing of, shall we say, “mature” singes—the CBT and LME. Second, an international glamour couple—CME and Deutsche Borse.

Pairing CBT and LME makes some sense. Both are venerable commodity exchanges. LME has a very good franchise, and is making the transition to electronic trading. CBT has made an effective transition to electronic trading (there have been a few recent technology glitches, but the grains are steadily migrating to the electronic system). Moreover, CBT has the customer base and marketing resources to vastly expand LME’s reach. There are no antitrust issues. Regulatory matters may pose something of a complication, but they should be workable.

In some respects, ICE might be a closer fit with LME; ICE is already competing head-to-head with NYMEX, which (through its COMEX division) is LME’s sole serious competitor. Moreover, ICE has a major operation in London, which could ease regulatory and operational roadblocks. However, it is doubtful that ICE could do two major deals in short order; remember it is already in the process of acquiring the NYBOT. Moreover, (pace my just previous post) ICE is already taking a lot of political flak in the US. A good deal of this may well be the result of US politicians carrying NYMEX’s water. A proposed ICE-LME combination would certainly intensify that political scrutiny.

CME-DB is somewhat more problematic. Things are complicated, as there are proposals to merge DB’s stock trading operations with Euronext. This would make the CME-DB tie up a marriage between derivatives exchanges. This would make economic sense if the integration issues are not too severe. Globex is arguably the premier derivatives trading platform in the world, and Eurex’s system is getting a little long in the tooth. (Eurex is DB’s derivatives trading arm.) Both have strong, and highly complementary, franchises, and complementary strengths in customer base and marketing.

Integration issues are a big “if,” however. On top of the normal difficulties in merging systems (see my earlier post re LCH.Clearnet) the regulatory, and especially the cultural and political, barriers may be particularly acute in this case. Part of the hangup in DB-Euronext talks is German insistence that Frankfurt retain the leading role in the partnership. It’s likely that it would make similar demands of the CME. This could be awkward and messy. (Anybody following the Airbus fiasco? If you are, would you want to be involved with a European “national champion”? Is death an option?) There might also be some interesting anti-trust issues here. I don’t see any sense to combining DB’s stock trading operations with CME’s futures business.

Some of the reporting on the potential merger suggests that this may be more of a Teutonic pipe dream than a real deal. The Wall Street Journal story on the matter states “[a]n official at one of Deutsche Borse’s largest shareholders said Friday that the deal would be a ‘no brainer’ for the company’s shareholders if the CME pays up for Deutsche Borse shares. This person speculated that Deutsche Borse’s shareholders would seriously consider a bid for the company at . . . a hefty premium of 30% to the company’s closing share price . . . of Friday.” Well, duh! Who wouldn’t take a deal where the other side overpays? The article states that the CME can afford it, ‘cuz its rich. So some DB shareholders are hoping that ze rich Amerikaner borsen will throw money at them. I hope they throw money at me too, but I’m not holding my breath.

As I’ve commented before, CME has exhibited admirable strategic discipline. Its management hasn’t let money burn a hole in their pockets. I trust that they will continue to do so, and only do a deal that makes economic sense.