Investor Presentation:
Strategic Joint Venture Between McGraw-Hill and CME Group
Prepared Remarks
November 4, 2011
Donald Rubin
Senior Vice President, Investor Relations
The McGraw-Hill Companies
Good morning. We welcome a worldwide audience to this morning’s call.
Earlier this morning, McGraw-Hill and the CME Group issued a news release announcing the planned
strategic joint venture that combines S&P Indices with Dow Jones Indexes to create a leading global
index services provider.
With us this morning to address the planned strategic joint venture are Terry McGraw, Chairman,
President and CEO of McGraw-Hill and Craig Donohue, CEO of the CME Group who is joining us
from Denver. After today’s presentation, we will open the call to take your questions.
On behalf of McGraw-Hill, as well as for my colleague, John Peschier, my Investor Relations
counterpart at the CME Group, I need to provide certain cautionary remarks about forward-looking
statements. Except for historical information, the matters discussed in the teleconference may contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995,
including projections, estimates, and descriptions of future events. Any such statements are based on
current expectations and current economic conditions and are subject to risks and uncertainties that may
cause actual results to differ materially from results anticipated in these forward-looking statements. In
this regard, we direct listeners to the cautionary statements contained in today’s presentation materials
and McGraw-Hill and CME Group’s Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S.
Securities and Exchange Commission.
We’re aware that we do have some media representatives with us this morning on the call. However this
call is for investors and we would ask that subsequent to this call questions from the media be directed
to Patti Rockenwagner in McGraw-Hill’s New York office at (212) 512-3533, or David Guarino in S&P
Indices’ New York office at (212) 438-1471, and Laurie Bischel in CME Group’s Chicago office at
(312) 907-0003.
Now, I would like to turn the call over to Harold McGraw III, chairman, president and CEO of The
McGraw-Hill Companies.
Terry, take it away.
McGraw-Hill and CME Investor Presentation
Prepared Remarks — November 4, 2011
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Harold McGraw III
Chairman, President and CEO
The McGraw-Hill Companies
Thank you, Don. Good morning everyone and thank you all for joining us today for this very exciting
announcement. By now I hope you have seen the press release announcing the planned strategic joint
venture between The McGraw-Hill Companies and CME Group, which combines S&P Indices with
Dow Jones Indexes to create a leading global index services provider.
As Don said, with me on the phone today is Craig Donohue, CEO of CME Group. Craig and I have
known each other for quite some time and we’ve been working together on this transaction for over a
year. For those of you who know Craig, he is an exceptional, visionary leader. He was the driving force
behind CME’s acquisitions of the Chicago Board of Trade and the New York Mercantile Exchange and
has led the Group’s expansion into a number of high-growth emerging markets as well. So, as you can
imagine, I’m quite pleased to be working so closely with Craig and his team to make this new joint
venture a success.
This morning, Craig and I will review the key terms of the deal and the benefits that we believe our
partnership will bring to our shareholders as well as the broader group of issuers, investors and
exchanges that make up our combined customer base.
We’ve invited key individuals from our deal teams to join us this morning. From the McGraw-Hill team
are: Lou Eccleston, President of McGraw-Hill Financial; Alex Matturri, head of S&P Indices and he
will soon be CEO of S&P/Dow Jones Indices; and Charles Teschner, Executive Vice President of
McGraw-Hill Strategy. From CME Group, we have Scot Warren, Managing Director, Equity Products
and Index Services.
As many of you may not be familiar with both McGraw-Hill and CME, I’d like to start by providing a bit
of background on both companies and the businesses they will contribute to the joint venture.
The McGraw-Hill Companies is a leading provider of content and analytics to the global capital and
commodities markets, and also the second-largest education company in the world. Last month, the
Corporation announced its Growth and Value Plan. As part of that plan, McGraw-Hill will split into two
distinct operating companies, one focused on digital learning and educational services and the other
focused on high-growth capital, commodities and commercial markets. “McGraw-Hill Markets” — the
current working name for our market-oriented business — includes such iconic brands as Standard &
Poor’s Ratings Services, S&P Indices, S&P Capital IQ, Platts, and JD Power.
S&P Indices, McGraw-Hill’s contribution to the joint venture, calculates over 700,000 indices, including
the S&P 500, the S&P/Case-Shiller Home Price Index and the S&P GSCI (Goldman Sachs Commodity
Index).
CME Group is the world’s leading and most diverse derivatives marketplace. The CME Group
exchanges — The Chicago Mercantile Exchange, the Chicago Board of Trade, and the NYMEX — offer
benchmark products across all major asset classes. The Group brings buyers and sellers together through
its CME Globex electronic trading platform and its physical trading facilities in New York and Chicago.
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CME Group also offers clearing and settlement services through CME Clearing. Through its joint
venture with Dow Jones, CME Group is a 90% owner of Dow Jones Indexes. Dow Jones Indexes
calculates over 130,000 indices, including the well-known Dow Jones Industrial Average.
The partnership we have announced this morning is an important strategic milestone for McGraw-Hill’s
Growth and Value plan as the partnership further enhances McGraw-Hill’s growth potential and ability
to catalyze markets. It also broadens an already successful relationship between McGraw-Hill and CME
Group that dates back over 30 years to the joint creation of the S&P 500 futures contract. McGraw-Hill
and CME have subsequently launched many other innovative products, including the S&P 500 E-mini
which today is the most liquid futures contract in the world, with average nominal daily trading volumes
in excess of $150 billion.
The S&P/Dow Jones Indices joint venture creates a leading index provider that will drive value for all
stakeholders. S&P/Dow Jones Indices will have the breadth and depth to provide both institutional and
retail investors with the cutting-edge products and services they need to invest and manage risk in
today’s complex markets. By leveraging the unique and complementary strengths of each parent
company, the joint venture will accelerate innovation and new product development to the benefit of
market participants around the globe. This enhanced growth profile, coupled with the joint venture’s
robust and diverse revenue model, improved operational efficiency and strong free cash flow generation,
will deliver meaningful value to our shareholders.
I will now review the terms of the transaction. S&P/Dow Jones Indices will operate as a joint venture
between McGraw-Hill, CME Group and Dow Jones. McGraw-Hill will contribute its S&P Indices
business, and CME Group and Dow Jones, through their current joint venture, will contribute the Dow
Jones Indexes business. The joint venture transaction will be tax free to all parties. In addition, McGrawHill will acquire the London-based Credit Market Analysis (CMA) from CME.
S&P/Dow Jones Indices will be 73% owned by McGraw-Hill, 24.4% by CME Group, and 2.6% by Dow
Jones.
A key element of the joint venture transaction is a new licensing arrangement between S&P Indices and
CME Group. The new license, which McGraw-Hill will contribute to the joint venture and which will
remain in place as long as CME holds an ownership stake in the joint venture, provides S&P Indices with
a diversified and enhanced revenue stream that fully aligns the parties’ interests. After closing, instead of
paying S&P Indices a fixed fee-per-trade, CME will pay a share of the profits that CME makes on the
trading and clearing of equity-based futures, swaps and options on futures.
Together, both McGraw-Hill and CME will benefit from the value created by the joint venture which
will leverage the strengths of each parent company to drive innovation to better serve its customers.
Craig and I will elaborate on that in just a moment.
The joint venture will be consolidated in McGraw-Hill’s financial statements. Alexander Matturri,
executive managing director of S&P Indices, will be named chief executive officer of the joint venture.
Lou Eccleston, president of McGraw-Hill Financial, will be the chairman of the company’s 7-member
Board and will report directly to me. The S&P/Dow Jones Indices Board will include five directors
designated by McGraw-Hill and two by CME Group.
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Prepared Remarks — November 4, 2011
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We expect the transaction to close during the first half of 2012, subject of course to regulatory approval
and customary closing conditions. The proposed transaction, which will not require a shareholder vote,
has been approved by the Boards of both The McGraw-Hill Companies and CME Group.
The transaction will be accretive to McGraw-Hill’s earnings immediately after it closes and as the joint
venture grows its revenues and expands its margins, McGraw-Hill, CME Group and Dow Jones will all
benefit.
Our two complementary index brands, with offerings for both institutional and retail investors, will be
harnessed together in one global index platform. S&P Indices and Dow Jones Indexes provide the basis
for over 500 ETFs with more than $380 billion under management. Additionally, collectively more than
$6 trillion in assets are benchmarked against the S&P 500 and the Dow Jones Industrial Average.
As I mentioned already, McGraw-Hill and CME have enjoyed a successful working relationship for over
three decades. With this joint venture, our interests become even more closely aligned as the profit
sharing arrangement under the new licensing agreement provides economic incentive to both parents to
collaborate on the development and launch of successful new products that meet customer needs in a
dynamic marketplace.
A true benefit to customers comes from the combination of CME’s unique customer insight and S&P
Indices’ product development expertise. Together, we will be better equipped to innovate to meet
customers’ increasingly complex needs.
We are excited about our partnership with CME Group, whose global exchange relationships and CME
Globex platform will enable our joint venture to accelerate its penetration into fast growing emerging
markets.
At this time, I would like to turn the call over to Craig Donohue, CEO of CME Group, for a review of
our enhanced growth opportunities.
Craig.
Craig Donohue
Chief Executive Officer
CME Group
Thank you very much, Terry. It’s a pleasure to join you this morning on what I think is a very exciting
day for each of our organizations. You and I, as you mentioned, and of course our two companies, have
had a successful long-term partnership, and I am really pleased that we will now be working even more
closely together for the benefit of our shareholders and our customers.
In addition, we are particularly pleased to expand our existing agreement with Platts, a division of
McGraw-Hill, and we look forward to expanding our collaboration with Platts in the energy and
commodities area, where CME Group has broad coverage on the trading and clearing side.
As Terry mentioned, CME Group originally established a licensing arrangement with S&P in the early
1980’s. At the time, an estimated $350 billion was indexed to the S&P 500 with a very limited set of
products that could be utilized to gain exposure. Following the introduction of S&P 500 futures in 1982,
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institutional asset managers could now manage price risks in their portfolios, fueling further growth in
adoption of the index as the institutional benchmark for measuring portfolio performance. Our successful
30-year partnership also spawned new options and related index products based on the S&P family of
indices. During this time, we also advanced the development of ETFs, index funds and total return
swaps, thereby increasing equity investment, portfolio diversification, and new risk management
products. Since the inception of our partnership, we have successfully grown the business, which trades
primarily on our industry-leading CME Globex platform, which is now distributed to customers
worldwide in more than 150 countries, and operating virtually 24 hours per day.
From 1982 until now, benchmarked products have grown from $350 billion to $4.83 trillion. Similarly,
the notional value of average daily trading volume has grown from $206 billion in 1982 to $39.3 trillion
in 2011. Our organization is very focused on expanding the reach of our equity products to new global
customers. Recently, we delivered strong equity volume growth during non-U.S. hours, and from
customers outside the U.S. In September, for example, electronic volume in our equity products
increased 99% on a year-over-year basis during European hours, and up 94% during Asian hours.
At the CME Group, in addition to having the premier equity index futures business, we also have a
leadership position in fixed income, foreign exchange, energy, metals and agricultural products, along
with a great history of innovation. Looking forward, the opportunity to create and sell new products and
increase the assets under management tied to ETFs and exchange traded products across multiple asset
classes and currencies we believe is significant.
Certainly, market data and analytics is another area of potential growth, and both McGraw-Hill and CME
Group have a significant opportunity to provide value added data and analytics to both retail and
institutional customers alike.
CME Group has been very active partnering with leading exchanges around the world, with the goal to
introduce our broad suite of derivatives products to new customers, who will trade our products along
with our partners’ products. With this joint venture in place, we will be well-positioned to offer index
calculation services to our global partners and customers.
The next slide illustrates the global reach in terms of the existing relationships that CME Group and S&P
have. We will certainly work to leverage these relationships to increase the number of indices available
on a global basis. Through this joint venture we expect to be even more attractive to potential partners
and customers around the world.
The last point, which many of you are likely well aware of is the significant growth in ETF assets under
management. Clearly, the U.S. and Europe have driven much of the expansion over the last decade.
However, the opportunity for significant growth in ETF assets in the emerging markets is certainly very
attractive. We look forward to participating in that future growth through this important joint venture.
In conclusion, we are pleased to extend our exclusive relationship with McGraw-Hill for as long as we
are involved with this joint venture, and we look forward to participating in a much broader index
business in the future. With that, I am going to turn the call back over to Terry.
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Prepared Remarks — November 4, 2011
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Harold McGraw III
Chairman, President and CEO
The McGraw-Hill Companies
Thanks, Craig. We all share the same excitement that you’ve just outlined and the global opportunities
for sure. All of these exciting opportunities that we’ve discussed will drive very attractive financial
performance. Already, pro forma revenue for the joint venture exceeds $400 million and operating
margins are above 50%. And we are projecting over $435 million by the end of next year. Once the
businesses have been combined, we expect to see even better results.
First of all, the joint venture will be well-positioned to capitalize on favorable market dynamics
including double-digit growth in ETF assets under management and meaningful increases in global
derivatives volumes.
Furthermore, the joint venture will have a robust and diversified revenue model with four main
components:
 Assets-under-management based fees paid by issuers of ETFs, mutual funds, and structured
products that are based on our indices;
 Transaction fees paid by exchanges and clearing houses based on trading volumes for listed and
over the counter derivative contracts that use index IP;
 Fees from CME Group based on our profit sharing agreement under the new licensing
relationship, as previously discussed; and
 Recurring revenue from data subscriptions and fees we charge investment houses for creating
and maintaining custom indices.
We will reduce costs by creating a consolidated index production platform and rationalizing technology
infrastructure, data procurement, administrative functions and data distribution. We also anticipate
leveraging the McGraw-Hill’s infrastructure to capture additional cost savings.
Before we wrap up and get to your questions, I have a few housekeeping points to make: We plan to
make the regulatory filings as quickly as possible and will of course operate the two index businesses
separately until the transaction closes. As we said earlier, we expect the transaction to close during the
first half of next year, pending regulatory approval, and it will be immediately accretive to McGrawHill’s earnings, post-close. Each of our relationships with other exchanges will remain in place, and the
deal is structured such that the possibility of including other partners in the future remains open.
To sum up, as you have heard, this is a terrific transaction that provides tremendous opportunity for
shareholders as well as customers. The product issuers, exchanges and investors who rely on indices will
benefit from a deeper lineup of indices, covering more asset classes and market segments as well as a
business model focused on innovation, performance and impact.
Thanks.
McGraw-Hill and CME Investor Presentation
Prepared Remarks — November 4, 2011
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To access the accompanying slides online, go to:
http://investor.mcgraw-hill.com/phoenix.zhtml?c=96562&p=irol-EventDetails&EventId=4225043
"Forward-Looking Statements”
Statements in this presentation that are not historical facts are forward-looking statements. These statements are not
guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements.
These statements include, but are not limited to, the benefits of the transaction involving The McGraw-Hill Companies and
CME Group, including future financial and operating results, the joint venture’s plans, objectives, expectations and
intentions and other statements that are not historical facts. Such statements are based on current beliefs, expectations,
forecasts, and assumptions of The McGraw-Hill Companies and CME Group’s management which are subject to risks and
uncertainties which could cause actual outcomes and results to differ materially from these statements. Other risks and
uncertainties relating to the proposed transaction include, but are not limited to the satisfaction of conditions to closing,
including receipt of antitrust, regulatory and other approvals; the proposed transaction may not be consummated on the
proposed terms and schedule; uncertainty of the expected financial performance of the joint venture following completion of
the proposed transaction; The McGraw-Hill Companies and CME Group may not be able to achieve the expected cost savings,
synergies and other strategic benefits as a result of the proposed transaction or may take longer to achieve the cost savings,
synergies and benefits than expected; general industry and market conditions; general domestic and internal economic
conditions; the strength of the equity and debts markets; and governmental laws and regulations affecting domestic and
foreign operations. The McGraw-Hill Companies and CME Group undertake no obligation to publicly update any forwardlooking statements, whether as a result of new information, future events or otherwise.
For more information regarding other related risks, see Item 1A of McGraw-Hill’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2010 and Item 1A of CME Group’s Annual Report on Form 10-K for the fiscal year ended December 31,
2010 and any updates provided in their most recent Quarterly Reports on Form 10-Q. Copies of said 10-Ks and 10-Qs are
available online at http://www.sec.gov or on request from the applicable company. You should not place undue reliance on
forward-looking statements, which speak only as of the date of this presentation. Except for any obligation to disclose
material information under the Federal securities laws, The McGraw-Hill Companies and CME Group undertake no obligation
to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this
presentation.
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Prepared Remarks — November 4, 2011
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