The Millions for the Merger | Essay | Chicago Reader

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The Millions for the Merger

Why is the city offering $40 million in public money to subsidize the Merc's merger with the Chicago Board of Trade?

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Chicago is the intellectual hometown of Milton Friedman, the influential free-market economist who developed many of his libertarian theories at the U. of C. But you'd never guess that based on the city's recent intervention to help the Chicago Mercantile Exchange in a bidding war for the Chicago Board of Trade.

Here's the story, based on interviews with traders and officials from both the Merc and its rival, Atlanta-based Intercontinental Exchange Holdings. (All requested not to be identified.)

Last year, on October 17, officials from the Merc and CBOT announced they were merging to form a new company, CME Group Inc. Under the proposed terms, the Merc would buy CBOT for about $8 billion dollars. The sale required approval by CBOT's stockholders.

The merger would enable the two exchanges to streamline services, increase profits, and make more money for shareholders--though at the cost of layoffs for 400 employees. Terrence Duffy, the Merc's executive chairman, and CBOT chairman Charles Carey both supported it.

Hailing the deal, Mayor Daley visited the Board of Trade on October 31 to meet with Carey and Duffy and offer his blessings. "I want to thank the Chicago Board of Trade and the Chicago Mercantile Exchange for its vision, execution, and willingness to take a risk on the future of our great city," Daley said in his remarks.

But wait, not so fast. On March 15, Intercontinental Exchange, known as ICE, entered the picture with a counteroffer that forced CBOT stockholders to think twice about selling to the Merc. At $10 billion, the ICE bid offered CBOT stockholders more money. It also pledged to allow the exchange to keep operating as the Chicago Board of Trade and agreed to give shareholders a 51.5 percent controlling stake in the new company, which would be run by ICE's chief executive, Jeffrey Sprecher. Under the Merc's proposal, CBOT shareholders would control just over 30 percent of the company's shares.

With that offer a bidding war was on. On May 12 the Merc upped its bid to $9.91 billion, a 16 percent increase over its origi-nal offer. ICE then raised its bid to about $11.4 billion. The Merc countered by raising its offer to roughly $11.3 billion earlier this month.

In the spring, ICE officials came to Chicago and met with Daley's staff (though not with the mayor himself). They say they assured the mayor's aides they would keep the Board of Trade at its landmark headquarters at 141 W. Jackson and move its own corporate headquarters and "several dozen" corporate and technical jobs from Atlanta to Chicago. (ICE already has a regional office here in town.) They made no request for relocation assistance, as other corporations have done when moving here. ICE officials told me they wanted to keep the city from interfering in the bidding war.

But on July 6 the city, until then officially neutral, sided with the Merc. In a letter addressed to Carey, Duffy, and Craig Donohue, the Merc's CEO, Mayor Daley's chief of staff Lori Healey offered the city's financial help.

"On behalf of Mayor Richard M. Daley, the City of Chicago is prepared to offer the City's assistance to facilitate the real property acquisition and proper-ty rehabilitation that is part of your historic efforts to merge," Healey wrote. "We understand that as part of your merger, the CBOT building will become the main location for 'Open Outcry' trad-ing. The areas of the CME's space at 20 S. Wacker currently devoted to trading floors would be converted to office space. Rehabilitation and enhancement of other aspects of both buildings, including the associated existing office as well as other facilities in the city, will be undertaken."

No financial figures were included in Healey's letter, but Ann Saphir reported in Crain's Chicago Business that the city has offered to chip in up to $40 million in tax dollars.

On July 9, the Board of Trade's shareholders overwhelmingly approved the Merc's offer. ICE conceded, and with that the bidding war had ended.

All in all, the sale was a bonanza for CBOT shareholders, who saw their sale price leap by more than $3 billion thanks to ICE's counterbids.

What do the city's shareholders--you know, taxpayers--get out of the city's offer to turn over $40 million in property taxes? That's harder to figure.

As Crain's also reported, the money is most likely to come out of the city's teeming tax increment financing treasure chest, an unregulated $400-million-a-year property tax slush fund that the mayor has virtually unregulated access to.

By state law, TIFs are intended to create jobs, generate new property taxes, and spark economic development in blighted communities that but for the incentives would receive no development at all. But this $40 million isn't creating jobs, eradicating blight, or bringing in new tax revenue--and it's certainly not bringing development to poor neighborhoods. As far as I can tell the only thing it does is give one billion-dollar corporation an advantage over another billion-dollar corporation in its struggle to purchase a third billion-dollar corporation.

The offer comes at a precarious time for taxpayers. Schools and parks are underfunded, the county's laying off doctors and nurses, and taxpayers are about to take a big hit when property tax bills come out in the next few weeks. We clearly don't have a lot of money to waste.

The mayor said he made the offer to keep the Merc in town. "I will do anything possible to make sure they are staying here, make sure they expand--anything they need," Daley told reporters after Crain's broke the story. "We will be talking to them--whatever they need--but it is very important keeping them here."

The thing is, the Merc never said it was leaving, even if ICE won the CBOT bid. And it's not expanding, it's contracting, at least in the short term. Essentially Daley's rewarding the newly formed company for eliminating jobs.

The Merc hadn't asked the city for any assistance, according to Allan Schoenberg, a spokesman for the exchange. "My understanding is that it was an unsolicited letter of support for the merger," Schoenberg says.

So why did Daley offer it? Healey's letter "was written as a general letter of support," says city spokesman Jodi Kawada.

But the merger hadn't happened when Healey wrote her letter--ICE's offer was still in play. So why didn't Daley extend the same offer to ICE?

"I'll have to get back to you on that," Kawada said.

I have a feeling politics may have something to do with it. In February the Merc contributed $107,000 to Daley's reelection campaign. CBOT also contributed about $100,000. ICE contributed nothing.

Still, traders tell me Healey's letter didn't win the deal for the Merc by itself. By the time it was written, the Merc had almost matched ICE's price, so there was no strong incentive for CBOT stockholders to accept the competing bid. But Healey's offer certainly didn't hurt the Merc's chances in the bidding war. It was $40 million more that CBOT would receive had they sold to ICE. And it sent an unmistakable sign as to which of the board's two suitors Daley preferred.

I can't blame the traders if they wind up taking the city's money. If Daley offered you $40 million would you turn him down? The irony is that many of the Merc's founders are free-market advocates who despise government regulation and claim Friedman as their intellectual hero. They may not like government oversight, but they don't seem to mind government cash.

For more on politics, see our blog Clout City at chicagoreader.com.

Art accompanying story in printed newspaper (not available in this archive): illustration by Paul Dolan.

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