Bovespa Holding, which controls the São Paulo Stock Exchange, and the BM&F, Brazils main futures exchange, on Wednesday gained approval from their boards for a merger that will create the second-largest exchange in the Americas.
The two exchanges had announced last month they had entered talks, marking a further step in the consolidation of the worlds stock and futures exchanges, following a flurry of recent activity.
Last year, the Chicago Mercantile Exchange bought the Chicago Board of Trade for $11bn and the enlarged CME group this month finalised a deal to buy Nymex, the New York energy exchange, for $9.4bn.
However, it remains to be seen whether the two Brazilian exchanges will regain portfolio investors confidence after a rocky ride for the groups shares.
Both exchanges demutualised through IPOs within the past six months. Shares immediately jumped, coinciding with the peak of the Brazilian market, but have since fallen.
Low trading volumes, a sharp downturn in the number of IPOs and international market conditions have weighed heavily. Bovespa is highly dependent on foreign investors, who were responsible for some 70 per cent of IPOs purchases last year.
Bovespa Holdings IPO in November saw shares debut at R$23 and leap more than 50 per cent on the first day. Since then, they have dropped and were trading at R$26.60 on Wednesday. BM&Fs shares were launched at R$20 and had a similar trajectory. On Wednesday they were trading at R$17.60.
To improve performance, the exchanges will need to increase trading and revenues. To do this, they need to offer a wider range of products, in areas such as equity derivatives and options, and stimulate liquidity in mid- and small-cap cash-traded shares, said Ricardo Kobayashi, co-head of asset management at UBS Pactual in Rio de Janeiro.
The exchanges said the merger would squeeze expenses by 25 per cent up to 2010. That looks achievable, if aggressive, Mr Kobayashi said.
Shareholders of BM&F and Bovespa will each own 50 per cent of the new company and Bovespas shareholders will receive a R$1.24bn ($715m) payout to compensate for its higher market value.
The deal still requires shareholder approval, likely to be decided in late April, and the approval of market and antitrust regulators. If all goes well, the new company should be operational by the end of May and trade under the name Nova Bolsa.