The Chicago Mercantile Exchange is fighting to save its $9.1bn takeover of the Nymex, the historic home of oil trading in New York, in the face of trader opposition, shareholder lawsuits and an inexorable decline in the value of its offer.
The two companies are trying to finalise documents due to be sent to shareholders for approval, but the CME is facing mounting pressure to raise its bid, which was worth $2bn more when it entered exclusive talks with Nymex in January.
The CME is already the world's largest exchange but the acquisition of Nymex would fill the one major gap in the wide suite of products that are traded on CME exchanges. The company currently majors in futures and options based on interest rates, equity indices, currencies and agricultural commodities, and esoteric products such as weather futures. The Nymex, at its open-outcry trading floor in lower Manhattan and via its parallel electronic systems, accounts for two-thirds of global trading in energy futures and options.
Opposition to the terms of the deal is set to come to a head at a meeting next week between Nymex and its so-called "members", the 816 individuals and firms who hold trading seats. As part of the deal, members will receive $612,000 for their seats, but several campaigns have sprung up to complain that figure substantially undervalues the seats. Three-quarters of all members must approve the deal, an additional hurdle on top of winning over Nymex shareholders, and campaigners claim 400 seatholders will vote against, plenty to cripple the deal.
Relations between members and Nymex management have become strained because of the transition to electronic trading, which bypasses traditional floor brokers, and disputes over when members will receive a share of revenue from electronic trading.
Meanwhile, three separate Nymex shareholders Cataldo Capozza, Joan Haedrich and Polly Winters have filed lawsuits in the Delaware Chancery Court, arguing the deal undervalues the company.
Mark Rifkin, Mr Capozza's lawyer, said that Nymex managers have fat severance packages and relatively few shares in the company, leaving them with little personal incentive to fight for more from the CME.
Shares in the CME have plunged from $629 before the approach to Nymex to just $458 at the end of last week, as investors fear derivatives trading will slow now that hedge funds are being forced to cut back on debt. Nymex, meanwhile, has posted better-than-expected results because of the frenetic trading in oil, which has hit record prices. "It is pretty obvious to Mr Capozza that management comes out of this deal very well and investors don't," Mr Rifkin said. "The value of this deal has gone down and down and down, but results from the Nymex business have gone up and up and up."
CME directors have refused to publicly countenance improving the value of the offer to shareholders, and its finance director Jamie Parisi said he was unsurprised that members were trying to "up the ante" before the twin votes by members and shareholders. The two comp-anies say the deal will create a company better able to compete with private exchanges, and Nymex says it is the best deal for its shareholders.