It’s been 10 years since the CME Group has done a major acquisition and earlier today the company officially confirmed its bid for NEX Group. The deal is set to reshape the global fixed income market and significantly boost CME’s involvement in FX with the crown jewel of the deal: BrokerTec.
The size of the deal is estimated at £3.9 billion ($5.5 billion), a figure which many analysts and industry insiders see as quite significant. Considering the previous big acquisition of the CME Group, that of NYMEX back in 2008, the deal is raising some eyebrows in light of the market turmoil that was also present ten years ago.
On the other hand, the acquisition makes all the sense in the world considering the likelihood of more volatile markets coming ahead.
Shares of the CME Group have started to decline in the aftermath of the first rumors about an impending bid for NEX. With the net worth of the CEO of the UK company, Michael Spencer, now approaching $1 billion, the deal is highly discussed across mainstream financial media.
Futures Not Enough for CME
Apparently, the CME Group’s domination in the US futures market is not enough. The strategic step to acquire NEX is making the firm a leader on the US treasury market with the acquisition of the electronic trading business of the UK company, BrokerTec.
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The potential for a reformed treasury market is said to be the main reason for the bid and for the rather steep price when compared to the current earnings of NEX. If we compare the deal with the acquisition of NYSE Euronext on part of ICE, the price that the Chicago-based futures exchange is paying for NEX is rather steep.
While the ICE paid only two times higher than CME is for NEX, the revenues of NYSE Euronext were close to 10 times higher.
The CME Group is dominating futures trading in the US however it has few assets outside of its core business. As the CEO of the company explained in a statement today, the acquisition of NEX is to transform the international profile of the Chicago-based futures exchange and broaden its portfolio of futures with the rich list of electronic trading products that BrokerTec brings to the table.
The move comes despite harsh difficulties in cross-border exchanges. Earlier this year, a potential merger between the London Stock Exchange and Deutsche Borse got canceled.
NEX BrokerTec is the absolute dominator in electronic Treasury trading. The company also has a high share of the market in US and European repos. The potential savings for banks are material because they will be able to share the same collateral for trading futures and execute cash deals.