The ICE Age

IntercontinentalExchange CEO Jeff Sprecher is changing the way the world trades commodities.

Drew Ermenc

October 1, 2007

On Wall Street, the story of Jeff Sprecher is quickly becoming the stuff of legend.

A former power plant developer turned maverick innovator, the unabashed CEO, founder and chairman of IntercontinentalExchange (ICE) is helping transform the way financial commodities are being traded.

In an industry conspicuously averse to change, he's putting the custom of buying and selling commodities online – similar to what eBay did for auctions – and is enhancing trading from the historic exchange floor exercise of screaming men in funny coats to a new Internet-based digital marketplace. Sprecher, 52, certainly didn't create the centuries-old practice of trading commodities, but he may be perfecting the process.

ICE's success can be credited to a perfect storm of leadership, innovation, timing, entrepreneurship and gutsy business acumen. Sprecher's foresight into the future of financial exchanges and Internet commerce has shoved reluctant competitors like the New York Mercantile Exchange (NYMEX) into the technology age. Through his aggressive acquisitions strategy, Sprecher and ICE have gobbled up financial exchanges across the globe, taking his online business model to historic trading houses like London's International Petroleum Exchange (IPE) and the New York Board of Trade (NYBOT), and contributed to a frenzied exchange consolidation phase that shows no signs of slowing.

In 2005, ICE went public with the largest IPO in Georgia history, and was named the best performing stock by the New York Stock Exchange and The Wall Street Journal for 2006. And
although failing in a very public hostile takeover attempt for the Chicago Board of Trade (CBOT) this summer, the move sent strong signals to the financial world that ICE is not to be ignored.
Not bad for a company that has yet to celebrate its eighth birthday.

"I would rather own a much smaller piece of a bigger
thing than 100 percent of an idea."
– Jeff Sprecher

It's 1999, and the Internet is poised to take over our lives. The dot-com boom is at an all-time high and the fear of Y2K is making headlines across the globe. On New Year's Eve, Sprecher, then CEO and owner of Atlanta-based Continental Power Exchange (CPEX), is enjoying a winter break as millions around the world are celebrating the new millennium with bands and bubbly. He's spent the previous two years pitching a concept to more than 100 companies in his industry, but wasn't getting the attention he desired. Frustrated and reflecting on his lack of progress, Sprecher had come to a stark realization. "I said to myself, ‘We have to do something big,'" he recalls. "I made a resolution I was going to make this thing happen or walk away. And I decided
to really dedicate myself to get this thing done and do whatever it takes."

Sprecher is referring to his ambitious plan of taking the way electric power was sold, and putting the over-the-counter (OTC) commodity on an online free-market platform.

Prior to his purchase of CPEX, he spent most of his career in California as a real estate developer and power plant owner. In the 1990s, he was witness to California's decision to set up a market exchange in accordance with the deregulation issues taking place at the time. "The state was deregulating the industry at a wholesale level so that electric utilities would be forced go into the open market," he says. "[They] created a quasi-governmental power exchange that I thought disadvantaged the small independent power plant owner. As a power plant owner, I was interested in accessing those electric utilities to sell power to them. I wanted a free market where buyers and sellers could meet."

While California was limited by bureaucratic oversight, Sprecher saw opportunity for the rest of the country. He purchased CPEX in 1997, a small Atlanta technology company with a dedicated grid attaching 62 electric utilities together on a hard-wire network. "I thought if I had a network of electric utilities, I could build an electronic exchange that we could broadcast on that network," he says. "I bought CPEX in order to create a free market power exchange for the rest of North America outside of California."

Over the next two years, CPEX engineers perfected the technology capable of running an online electronic exchange. "When I bought the company, it was full of Java friendly," he recalls. "Remember, the Internet was not the obvious choice for future commerce at the time. My colleagues made the right decisions in that they made the
applications Internet friendly as well as being private-network friendly."

When Sprecher purchased CPEX, the winds of the digital age were picking up, but it wasn't until 1999, when the Internet commerce revolution was near its fever pitch, that Enron – one of the largest power companies in the country at the time – rolled out its online trading platform. Within two years of Enron Online's launch, the Houston-based company was recording an average of $2.5 billion a day in online transactions. Yet instead of offering a commodities exchange that pairs up buyers with sellers, Enron Online used the site to match trading partners … with themselves. This one-to-many market model worked great for the energy giant, but insiders saw the company's power growing too quickly.

Sprecher credits Enron with part of ICE's eventual triumphs because he considered it a flawed business model. "It was too successful for its own good," he says. "Its early success was
enough to galvanize the rest of the industry to come around [us]. We were able to convince people that it was a bad model. We told them we should have a neutral meeting place ...
where the buyers and sellers would come together but the operator of the marketplace would have no stake in the underlying transaction."

Sprecher's pitch of a free-market exchange began to finally resonate. "One by one, we had to convince them the rest of the industry was going to be a part of this," he says. "It was a sales
job of triangulating around and playing on the benefits and the insecurities of not being at the start up of this."

After talking to 107 different companies, many of them on numerous occasions, Sprecher finally convinced 13 of the top energy players and financial institutions, including Goldman Sachs, Deutsche Bank AG, Aquila Energy, Morgan Stanley Dean Witter, and BP Amoco, to join CPEX in the formation of IntercontinentalExchange. "It was everybody but Enron. We were able to get the top users of the marketplace to come together," he says. "We had this extreme pedigree to agree to back this little company."

By offering equity to the largest energy and financial institutions in the country, Sprecher took a risk by divesting himself into ICE, but he ensured the top players in the industry would be trading on his exchange, adding instant credibility and significant volume to his online business platform.

"It's not about me and the management team as
much as it's about putting the model in place and
getting out of the way."
– Jeff Sprecher

Timing couldn't have been better for ICE when it went live in August 2000. Internet commerce was exploding, and Enron was driving major utilities and investment firms to look for alternative means to buy and sell energy. Sprecher's basic belief was that the more transparent, liquid and efficient the system is for the traders, the higher the volume of trades. ICE's business model – like most exchanges – revolves around the fee ICE charges each time a transaction is made, a tollbooth on the online marketplace highway.

When Enron went bankrupt in 2001, ICE served as the major benefactor by recouping much of its online business, and saw volumes spike to record levels. More importantly, by supplanting Enron during its troubles, Sprecher's little Atlanta startup served as the savior to an unsettled energy market looking to avert a crisis.

Sprecher also began a series of acquisitions in 2001 that would expand his online business model globally, far beyond OTC products. He set out to purchase the IPE, one
of Europe's oldest commodities exchange. "[IPE] was the analog version of our digital platform," he says. "The opportunity was to make a virtual IPE and then take it global."

The purchase expanded ICE's trading options to include energy futures. percent of global oil-futures trading and was home to North Sea Brent crude contracts, but was still trading on the traditional exchange floor. "The allure was to ‘electronify' it," Sprecher says. "Unless you were in London and had a colorful jacket, it was hard to access." That changed in 2002, when Sprecher made good on his digital word, announcing that IPE would begin its conversion of the traditional open outcry methods to an all-electronic platform.

The transformation was complete in 2005. Now called ICE Futures Europe, the exchange is experiencing record numbers, all thanks to electronic trading. Nearly 12 million contracts were traded in July 2007, an increase of 47 percent from a year ago. The second quarter brought $43 million in revenue from ICE Futures alone, up 44 percent from last year's second quarter.
ICE now trades nearly 50 percent of the world's global crude oil on its electronic screens.

"When you transform a company, you have to
transform its culture, its employees, its
customers, and the society that's around it."
– Jeff Sprecher

Along with several of his marketplace peers, including the CBOT and the Chicago Merchantile Exchange (CME), Sprecher answered capital's siren call by taking ICE public in the fall of 2005. The offering raised $416 million for ICE and made Sprecher, initial investors and – because of stock option compensation within the organization – many of his employees happy and independently wealthy. With an average annual return of 196.8 percent in 2006 alone, the stock price has tripled since its offering, and with a market cap of $5 billion, makes the possibility of takeover by an outside organization considerably more difficult.

The capital also put Sprecher in a position to be more aggressive in its growth. In September 2006 – less than a year after its IPO – ICE announced its intentions to purchase NYBOT for $1 billion. A global leader in soft commodities such as coffee, sugar, orange juice and cocoa, the NYBOT purchase was a coup for ICE. By stealing the historic trading center out from under ICE's biggest rival, NYMEX, ICE quickly established an immediate physical presence in New York.

"NYBOT brought a lot of value to the company," says Zachary Scheidt, a hedge fund portfolio manager for Piedmont Investment Advisory in Atlanta, and a financial expert who blogs regularly on ICE (full disclosure: Scheidt's portfolio has included ICE stock since late 2005). "[The move] opens the door to some really innovative products. It diversifies their revenue stream away from energy contracts, and it gives them strong long-term growth prospects [with] the Russell and the U.S. Dollar Index as being potential home runs for the company."

Equally important, the deal brought the NYBOT clearing house into the fold. In the financial world, a clearinghouse is an entity required for exchanges to clear trades and "settle up"
each member of the exchange at the end of each trading day.

With ICE's new NYBOT clearing house, ICE is able to clear all transactions and traders in-house, bringing additional revenue that would otherwise have to be outsourced. NYBOT commodities
began trading on ICE's platform in January 2007, and volume has already exceeded expectations.

ICE has entered into several minor agreements with technology companies and marketplaces across the globe since the NYBOT deal, but nothing made headlines quite like the daring effort Sprecher made to acquire the oldest future and options exchange on the planet this past March.

Like a freshman cutting in on two seniors on prom night, Sprecher made an unsolicited, $11.8 billion offer for the CBOT in the midst of it's impending merger with its crosstown rival, the CME.

The move shocked Wall Street, yet ICE stock jumped 20 percent during the negotiations, a sign that investors were on board with Sprecher's vision. CME eventually – and begrudgingly – upped its offer by $3 billion to close the deal, but Sprecher had made his point. "[The takeover attempt] increased awareness of us as a company and also the management team here," he says. "Much like the IPE deal, we went out and met our shareholders and the CBOT shareholders to talk about this vision ... In the course of meeting people one-on-one, you get to know them. The community got a sense of us as managers to help reinforce how we run our business. A lot of that was with a conscious decision to be very professional, because we went into it not only hostilely, but also as an extreme underdog."

Sprecher has perfected that underdog role, flying under the radar for most of his company's short life. But now with a market cap of $11 billion, operations in 50 countries, and more than 500 employees across the globe, the spotlight has shifted onto his fast company – and the man behind it.

Rich Repetto, an equity analyst and principal with Sandler O'Neill, sees Sprecher's leadership as a reason why the company is maintaining success. "Volume growth has been significant. The margins and profitability has been tremendous," he says. "He's been an innovator. They've opened the OTC cleared energy trading, and with the mergers that he's done, he's proven that he can consolidate and integrate as well."

Yet Sprecher's persona doesn't rub everyone the right way. "There's a lot of polarity there," Scheidt says. "People who are involved in the ICE story see him as a dynamic leader, an innovative leader, and someone with a lot of creativity. But if you talk to someone who's been involved with the CME or CBOT members, they may view him as a kind of a renegade or cowboy, an upstart trying to take over the system. I have a lot of respect for him and the company and how they've grown, but I do think you see from the older, stodgy Wall Street-type … a little less in the way of respect."

At the end of the day, the one constant is keeping his shareholders happy. "It's their profitability and their growth in that profitability," Scheidt says. "They've been able to be innovative and create new products, create new ways for old products to trade, and they are capturing a large portion of market share in areas that have been traditionally been floor-traded contracts. They have a very optimistic outlook for the next three to five years."

ICE is still in growth mode, and as of press time, is completing the acquisition of the Winnipeg Commodity Exchange, the only commodity futures exchange in Canada. The move will strengthen ICE's role in agricultural commodities such as wheat, flaxseed, and barley, and perhaps tap the partnerships that Sprecher was searching for in his failed CBOT merger. ICE also has started a market data division, parlaying all the information gathered from its exchanges into information packets and charging premium prices to subscribers. The new data sector is providing a growing additional revenue stream for the company, generating $18 million already in this year's second quarter.

In June, the company also announced it has negotiated the rights to trade the well-respected Russell Index Futures Contracts on its exchange. The bold move cost ICE $50 million, but because of its exclusivity, eliminated the possibility of CME trading the contract on its own exchange. And starting in the third quarter 2008, ICE Futures Europe is set to finally begin clearing its own contracts, a move that is projected to generate an additional $25 to $30 million in revenue in the remaining six months of next year.

Whether he's playing the role of David – or Goliath – Sprecher is helping write the history of an age-old industry. "He is a breath of fresh air to listen to because of his thoughts and his thinking toward exchanges," Repetto says. "He's not just riding the wave of higher volumes – which certainly he has helped and played a role in – but he's also thinking about trading and liquidity, and the role of exchanges going forward. He's a visionary."

Related Content:

• Atlanta Companies Go Green