ICE could be prey or predator after CME-CBOT deal

A trader on the floor of the Chicago Board of Trade, July 9, 2007. The Chicago Mercantile Exchange's victory in the takeover battle for CBOT Holdings Inc. may set off a new round of courtship as rival options and futures exchanges seek partners.

NEW YORK (Reuters) - The Chicago Mercantile Exchange's CME.N victory in the takeover battle for CBOT Holdings Inc. BOT.N may set off a new round of courtship as rival options and futures exchanges seek partners.

Shareholders of CME and CBOT voted on Monday to merge, creating the world's largest exchange specializing in derivatives, the lucrative financial contracts that allow investors to bet on anything from stock prices to the weather.

The presence of such a behemoth is likely to spur energy exchange IntercontinentalExchange Inc. (ICE.N), which lost a months-long battle for CBOT, to acquire a competitor or become a takeover target to remain competitive, analysts said.

"For ICE to remain competitive now, they will have to grow in mass," said Mark Williams, an energy markets expert and professor of finance at Boston University. "And there are very few brides left that would provide the mass ICE needs."

The new entity, to be called CME Group, will control more than 85 percent of U.S. options and futures trading volume.

Exchanges around the world are consolidating because sophisticated electronic trading systems now allow them to offer global markets for trading in equities, options, futures and other products.

Williams said consolidation is the only way to go because individual exchanges cannot independently grow fast enough to provide investors with all the sophisticated trading technologies and products in the market.

"The playing field (for exchanges) keeps changing because the competition keeps changing who they are," he said.

WHO WILL ICE ASK TO DANCE?

Some analysts said the New York Mercantile Exchange NMX.N, which trades benchmark crude oil and natural gas futures, is a good fit for Atlanta-based ICE, which built its reputation on over-the-counter energy contracts.

Nymex currently has a market value of $11.6 billion, while ICE is worth $11 billion.

In January, ICE expanded into soft commodity trading by buying the New York Board of Trade. Analysts have said that, for ICE to grow into a global exchange, it needs to develop a multi-product portfolio.

"Nymex is not particularly cheap right now and part of the reason is that its investors have been expecting someone to come in and make an offer," said Morningstar Inc. analyst Patrick O'Shaughnessy.

That "someone" could be ICE or even NYSE Euronext (NYX.PA), whose Chief Executive, John Thain, has said the transatlantic exchange is looking at acquisitions to drive its U.S. futures business.

The NYSE Group completed its $14.6 billion acquisition of Euronext NV in April to become a transatlantic entity with six cash equities and six derivatives exchanges.

German bourse operator Deutsche Boerse AG (DB1Gn.DE), which recently acquired U.S. options market International Securities Exchange Holdings Inc. ISE.N for $2.8 billion, could also be interested in ICE to expand its U.S. presence.

A spokeswoman for Nymex was not immediately available for comment and a spokespersons for NYSE Euronext and ICE declined to comment.

"The underlying reason for the interest is that the U.S. futures industry is still a great place to do business," said O'Shaughnessy. "Profit margins are fantastic and growth drivers are really strong."

Yet T.Rowe Price bought shares of three exchanges, including CME, ICE and Deutsche Boerse, based on their prospects for independent growth rather than growth through mergers, said Larry Puglia, who manages the investment management company's Blue Chip Growth Fund.

Puglia is concerned about exchanges overpaying for acquisitions, but added: "We feel better about the industry now than we did two weeks ago because the CME-CBOT deal terms have been finalized and we know ICE or CME are not going to pay more."

He expects ICE to make another bid soon or become a takeover target. Although he did not speculate on what the next logical step for ICE might be, "in general, we always want managements to be disciplined about what they pay for acquisitions."